ORGANIZATION    CHART 


BOARD    OF   DIRECTORS 


FUNCTIONAL   COMMITTEES 


Finance 

Accounts 

Statistics 

Factory 

Labor 

Sales 

New  De- 
velopment 

Pres. 
Gen.Mgr. 
Adviser 

V.  Pres. 
Treas. 
Secy. 

Secy. 
V.  Pres. 

Gen.Mgr. 
Adviser 
SalesMgr. 

Secy. 
Gen.Mgr. 

SalesMgr. 
Gen.Mgr. 
Secy. 

SalesMgr. 
Gen.Mgr. 
Treas. 

ADVISORY   STAFF 


Counsel 
Auditor 

Assistant  to  V.  Pres. 
(Leak  Hunter) 


Chief  Engineer 
Mechanical  Expert 
Chemist 
Advertising  Expert 


Reporting  to  department  executives  or  to  functional  committees. 


DEPARTMENTS 


ACCOUNTS 
AND 
STATISTICS 

FACTORY 

SALES 

EXECUTIVES 

Secretary 

Gen.  Mgr. 

Sales  Mgr. 

UNDERSTUDIES 

Ass't  Secretary 

Ass't  G.  Mgr. 

Ass't  S.  Mgr. 

OPERATING   FORCE 

Cashier 
Clerks 

Superintendent 
Foremen 
Workmen 

Salesmen 
Clerks 
Warehousemen 

INVESTIGATING 
AN  INDUSTRY 

A  SCIENTIFIC  DIAGNOSIS  OF  THE 
DISEASES  OF  MANAGEMENT 


BY 

WILLIAM  KENT 

CONSULTING  ENGINEER 

AUTHOR  OF  "THE  MECHANICAL  ENGINEER'S  POCKET  BOOK* 
AND  OF  "STEAM  BOILER  ECONOMY" 


WITH  AN   INTRODUCTION   BY 

HENRY  L.  GANTT 

AUTHOR  OF  "WORK,  WAGES  AND  PROFITS" 


FIRST   EDITION 
^  "FKOllSAND 


NEW   YORK  .,       (/  / 

JOHN  WILEY  &  SONS,  INC. 
LONDON:    CHAPMAN   &   HALL,  LIMITED 

1914 


Copyright,  1913,  by 
WILLIAM  KENT 


PUBLISHERS  PRINTING  COMPANY 
207-217  West  Twenty-fifth  Street,  New  York 


CONTENTS 


PAGE 

PREFACE v 

INTRODUCTION vii 

CHAPTER 

I.    GENERAL  CONSIDERATIONS i 

II.    A  BUSINESS  DIAGNOSTICIAN 15 

III.  THE  DIAGNOSIS;  THE  FACTORY 27 

IV.  THE  ACCOUNTING  AND  SALES  DEPARTMENTS    ...  37 
V.    THE  DOCTOR'S  PRELIMINARY  REPORT      ....  52 

VI.    THE  SALESMEN'S  CONFERENCE 68 

VII.    THE  DOCTOR'S  OPINIONS  AND  RECOMMENDATIONS  .  82 
VIII.     PROPOSED    REORGANIZATION    OF   THE    BOARD    OF 

DIRECTORS 96 

IX.     DUTIES  OF  THE  FUNCTIONAL  COMMITTEES  OF  THE 

BOARD  OF  DIRECTORS 109 

APPENDIX — A    NEW    KIND    OF   FACTORY    EXPERT — THE 

LEAK  HUNTER 117 

LOCATING  AN  INDUSTRY                               .     .  121 


in 


PREFACE 

THIS  book  is  a  reprint,  with  a  few  slight  alterations, 
of  a  series  of  nine  articles  that  appeared  in  Industrial 
Engineering ,  February  to  October,  1913.  It  relates 
to  the  application  of  the  principles  of  scientific 
management  to  all  industrial  problems,  including 
those  of  distribution  and  selling,  and  incidentally 
treats  of  some  of  the  causes  of  the  "high  cost  of 
living." 


INTRODUCTION 

MR.  KENT  is  not  attempting  to  put  before  the 
public  a  new  idea;  he  is  simply  elaborating  an  old  one. 
In  fact,  his  whole  book  is  based  on  the  old  saying 
"Look  before  you  leap."  In  other  words,  find  out 
all  possible  facts  about  an  industry  before  making 
up  your  mind  about  it. 

Many  intelligent  people  will  tell  you  that  they  do 
investigate  thoroughly  any  enterprise  before  going 
into  it,  yet  not  a  few  enterprises  fail  for  reasons  that 
could  have  been  known  beforehand. 

Everybody  agrees  that  the  prospects  of  a  new  enter- 
prise should  be  very  carefully  investigated  before  it 
is  gone  into,  but  the  failures  from  causes  that  could 
have  been  foreseen  are  sufficiently  numerous  to  make 
it  clear  that  as  yet  such  investigations  have  not 
always  included  all  the  factors  involved.  The  great 
value  of  Mr.  Kent's  book  is  that  he  puts  the  subject 
in  concrete  form,  and  shows  clearly  what  may  be  ac- 
complished by  proper  work  in  this  field.  It  is  not 
to  be  expected  that  many  readers  will  agree  in  detail 
with  all  of  Mr.  Kent's  suggestions,  but  they  will  set 
people  to  thinking.  The  fact  that  he  so  strongly 
insists  on  the  application  of  the  scientific  method  as 

vii 


Vlll  INTRODUCTION 

far  as  possible  to  all  business  problems  is  of  great 
importance,  for  in  the  past  too  many  questions  have 
been  decided  by  "judgment,"  which  is  often  another 
word  for  guess. 

Before,  however,  the  use  of  the  scientific  method 
can  become  universal,  our  leading  men  must  appre- 
ciate its  value,  which  they  do  not  to-day,  to  any 
.great  extent. 

He  also  makes  clear  that  it  is  not  only  the  new 
enterprise  that  needs  to  be  investigated,'  but  that  in 
evefy  established  business  we  should  continually 
know  not  only  how  well  each  one  of  its  functions  is 
being  performed,  but  exactly  how  it  stands  with  refer- 
ence to  its  competitors  in  the  most  important  factors 
affecting  its  welfare.  A  knowledge  of  the  advan- 
tages or  disadvantages  it  possesses  with  regard  to  its 
competitors  should  always  be  available  if  possible. 
If  this  is  not  possible  they  should  be  studied  care- 
fully at  frequent  intervals.  Among  the  heads  under 
which  these  comparisons  should  be  made  are  location, 
equipment,  system  of  management,  policy,  and 
selling  methods.  A  careful  comparison  as  far  as 
possible  of  each  one  of  these  subjects  will  often  shed 
light  on  the  questions  to  what  should  be  done  to  make 
a  company  more  prosperous. 

Such  investigations  and  comparisons  only  too  ire- 
quently--show--^ip--xieieiits_that  all  will  admit,  but 
which  it  takes  heroic  measures  to  correct. 


INTRODUCTION  ix 

r  •,  x       ' 

If  on  account  of  changes 'of  any  kind  the  location 
ceases  to  be  desirable,  it  is  extremely  difficult  to  get  up 
sufficient  courage  to  transfer  the  business  bodily  to  a 
new  place  better  situated.  Deficiencies  in  equipment 
are  the  most  easy  to  remedy,  and  a  change  in  the 
system  of  management  to  keep  abreast  of  the  times 
does  not  to-day  seem  £Uch  a  radical  move  as  it  did  a 
few  years  ago;  but  to  get  a  board  of  directors  to 
change  its  policy,  or  a  selling  organization  to  reform 
wasteful  methods,  is  to-day  almost,  impossible  -of  ac- 
complishment. A  few  years  ago  the  same  thing 
might  have  been  said  about  the  system  of  manage- 
ment, so  it  is  reasonable  to  expect  that  directors  and 
salesmen  will  as  a  class  some  day'  be  guided  by  facts 
rather  than  by  "judgment." 

With  regard  to  the  general  subject  of  "Investigat- 
ing an  Industry/'  whether  it  be  one  that  is  proposed 
or  one  already  in  existence,  the  facts  regarding  the 
effect  of  its  location  can  be'quite  readily  determined; 
questions  concerning  equipment  are  being  settled,  and 
the  subject  of  management  is  being  quite  generally 
studied.  The  first  two  of  these  subjects  are  dis- 
tinctly tangible,  and  after  a  comparatively  small 
amount  of  study  the  third  begins  to  assume  a  tangible 
shape,  hence  it  is  only  reasonable  that  these  subjects 
should  be  first  given  attention.  The  effect  of  the 
policy  as  dictated  by  a  board  of  directors  is  the 
most  difficult  to  measure.  On  this  account  and 


:  INTRODUCTION 

^because  the  directors  often  know  but  little  about  the 
business  it  is  extremely  difficult  to  get  their  consent 
to  desirable  changes  as  long  as  they  are  making 
money. 

When,  however,  the  balance-sheet  begins  to  show 
a  loss,  they  are  usually  ready  for  changes  that  are 
little  short  of  revolutionary.  By  a  proper  set  of 
records,  or  by  an  investigation  from  time  to  time,  in- 
formation might  be  readily  available  which  would 
enable  the  factory  to  make^  its  changes  by  evolution. 
When  losses  come  there  is  seldom  any  attempt  to 
find  out  what  they  are  caused  by,  but  it  is  generally 
assumed  that  they  are  the  fault  of  the  shop. .  As  -a 
matter  of  fact,  it  is  quite  frequent  that  they  are  the 
result  of  a  ruling  of  the  board  of  directors,  who  have 
not  understood  the  effect  of  the  order  they  gave. 

The  cost  of  selling  is  in  most  kinds  of  business  ex- 
tremely large,  but  that  is  rapidly  coming  under  the 
class  of  subjects  to  be  studied,  and  the  methods  of 
scientific  management  applied  to  selling  promise  to 
do  much  to  reduce  this  cost,  but,  as  intimated  before, 
salesmen  as  a  rule  are  not  in  sympathy  with  these 
methods. 

Mr.  Kent  tells  us  to  study  these  problems  scien- 
tifically, illustrates  the  subject  with  numerous  ex- 
amples of  how  such  study  may  be  conducted,  and  tells 
us  what  we  may  expect  to  accomplish  if  the  results 
of  the  study  are  carried  out. 


INTRODUCTION  xi 

So  far  what  has  been  written  on  scientific  manage- 
ment covers  only  the  shop,  but  Mr.  Kent  feels  that 
the  term  really  includes  everything  concerning  a 
factory  or  an  industry. 

This  broad  conception  of  the  meaning  of  the  term 
is  undoubtedly  correct,  and  the  task  of  the  future  is 
to  get  the  scientific  method  applied  to  all  industrial 
problems  of  whatever  kind. 

HENRY  L.  GANTT. 


INVESTIGATING  AN  INDUSTRY 


CHAPTER  I 
I 

General  Considerations 

THE  literature  on  Scientific  Management  which 
has  appeared  in  the  last  five  years  has  laid  so  much 
emphasis  on  matters  relating  to  the  efficiency  of  labor, 
that  many  of  its  readers,  and  its  writers  as  well,  seem 
to  have  lost  sight  of  the  fact  that  scientific  manage- 
ment relates  to  every  element  in  industry,  and  that 
labor  saving  is  only  one  of  many  elements.  Even 
the  authors  of  the  report  on  "The  Present  Status  of 
the  Art  of  Industrial  Management,"  presented  at  the 
annual  meeting  (1912)  of  the  American  Society  of 
Mechanical  Engineers,  have  failed  to  recognize  this 
fact,  for  they  say  "the  term  'scientific  management' 
has  been  generally  and  loosely  applied  to  the  new 
system  and  methods.  .  .  .  The  expression  t  labor- 
saving  management'  better  conveys  the  meaning  of 
the  movement."  Throughout  the  report  "the  terms 
'industrial  management'  and  'labor-saving  manage- 
ment' are  used,  the  first  to  denote  the  subject  broadly, 
the  second  tbejnewer^ltitiide." 

The  true  relation  between  industrial  management 
1 


INVESTIGATING   AN   INDUSTRY 


and  labor-saving  management  may  be  shown  by  a 
chart,  as  follows: 

CHART  SHOWING  TRUE   RELATION   BETWEEN 
INDUSTRIAL    MANAGEMENT   AND    LABOR- 
1  SAVING  MANAGEMENT 


Industrial 


Kind 

Traditional  or 
Unsystematized 

} 
Transitory  or 


Management  )  Systematized 


Scientific 


Characterized    by     Rule 
,    of  thumb;  no  cost  sys- 
^       tfems,  no  statistics. ( 

(.Cost  systems,  partial  Vec- 
j  '  ords,  occasional  invekti- 
[  gations.  r  / 

Investigations  of  every 
detail.  Studies  of  prod- 
uct, of  process,  of 
machinery,  of  material, 
of  labor,  of  burden,  of 
market  conditions,  etc. 


s  Industrial  management  means  broadly  the  manag- 
ing of  an  industry;  it  may  be  good,  bad  or  indifferent; 
scientific  management  is  both  a  science  and  an  art ;  it 
is  the  kind  of  industrial  management  that  makes 
studies  and  researches  to  discover  laws  and  principles 
in  every  branch  of  the  business,  and  that  carries  on 
the  business  in  the  light  that  these  researches  have 
revealed.  Labor  saving  is  one  of  the  objects  of 
scientific  management,  but  not  the  only  one,  and 
labor-saving  management  is  not  necessarily  scientific 
management;  it  may  be  unscientific.  For  example, 
coal-handling  machinery  and  automatic  stokers  save 
labor  in  the  boiler  room,  but  under  scientific  manage- 
ment they  would  not  be  installed  until  it  is  shown  by 
a  careful  study  of  all  the  conditions  that  their  cost 


GENERAL   CONSIDERATIONS  3 

for  repairs,  interest  on  investment,  etc.,  will  not 
exceed  the  saving  in  wages.  A  molding  machine  will 
save  labor  in  the  foundry,  provided  there  is  enough 
work  for  it  to  do,  but  it  is  poor  management  to  pur- 
chase one  unless  the  market  for  its  product  is  assured. 
One  writer,  contributing  to  the  report  of  the  com- 
mittee above  mentioned,  defines  scientific  manage- 
ment as  follows :  ^  v 

The  critical  observation,  accurate  description, 
analysis  and  classification  of  all  industrial  and  business 
pheribmena  of  a  recurring  nature,  including  all  forms 
of  co-operative  human  effort,  and  the  systematic  appli- 
cation of  the  resulting  records  to  secure  the .  mofet . 
economical  and  efficient  production  and  regulation  of 
future  phenomena. 

The   committee   quotes    the    following   from   Mr. 
\  Henry  R.  Towne's  paper  on  "The  Engineer  as  an 
Economist,"  written  as  long  ago  as  1886: 

Executives  must  have   a  practical  knowledge  of 

yhow  to  observe,  record,  analyze  and  compare  essential 

facts  in  relation  to  ...  all  ...  that  enters  into  or 

affects  the  economy  of  production  and  the  cost  of  the 

product. 

The  report  says  further: 

We  conceive  the  prominent  element  in  present-day 
industrial  management  to  be:  the  mental  attitude 
that  consciously  applies  the  transference  of  skill  to 
all  the  activities  of  industry.  Here  emphasis  is  placed 
on  the  word  all,  for  the  restricted  application  of  this 


4  INVESTIGATING   AN   INDUSTRY 

principle  to  machines  and  tools  has  been  highly 
developed  for  a  long  period.  But  its  conscious 
application  in  a  broad  way  to  the  production  de- 
partments, and  particularly  to  the  workmen,  we  be- 
lieve has  been  made  during  the  last  quarter  of  a 
century. 

The  three  quotations  express  fairly  the  general 
understanding  of  the  ablest  writers  as  to  what 
scientific  management  is,  but  a  critical  examination 
shows  that  each  of  them  has  limitations  which  it 
would  be  well  to  remove  in  order  to  give  the  term 
scientific  management  the  broad  significance  to  which 
it  is.  really  entitled.  Thus  the  first  quotation  may 
be  improved  by  omitting  the  words  "of  a  recurring 
nature,"  -and  thereby  broadening  the  meaning.  The 
second  and  third  quotations  seem  to  limit  scientific 
management  to  the  four  walls  of  a  shop.  They 
should  be  expanded  so  as  to  cover  all  the  business 
phenomena  that  relate  to  the  industry,  whether  they 
are  inside  or  6utside  of  a  shop.  The  end  of  the 
second  quotation  might  be  changed  so  as  t6  read  ^all 
that  enters  into  or  affects  the  economy  of  production,* 
the  cost  of  the  product,  the  present  and  prospective 
market  for  the  product,  the  selling  department  and 
the  possible  profits."  The  second  clause  of  the  third 
quotation  might  read  "the  mental  attitude  that 
consciously  applies  the  principles  of  scientific  investi- 
gation to  all  the  phenomena  of  business  and  the 


GENERAL   CONSIDERATIONS  5 

transference  of  skill  to  all  the  activities  of  industry, 
particularly  to  the  workmen." 

Scientific  management  in  its  broadest  aspect  is 
not  merely  "labor-saving  management,"  it  is  not 
even  "shop  management";  it  is  industrial  manage- 
ment by  the  scientific  method.  It  is  not  limited  to 
cost  of  production,  but  extends  to  methods  of  dis- 
tributing and  marketing  the  product,  to  meeting  the 
changes  in  character  or  fashion  of  the  product,  to 
questions  of  concentration  or  expansion,  of  relocation, 
of  finance,  etc.  Its  most  prominent  element,  as 
stated  in  one  of  the  above  quotations,  is  a  mental 
attitude,  and  its  result,  which  will  come  gradually 
within  the  next  twenty  years,  is  nothing  less  than 
an  industrial  revolution,  comparable  with  that 
which  occurred  when  the  factory  system  took  the 
place  of  the  domestic  workshop  and  when  the  loco- 
motive supplanted  the  stage-coach. 
%  It  is  fortunate,  in  many  respects,  that  industrial 
revolutions  take  place  slowly.  Twenty  years  after 
Stephenson's  success  with  the  "Rocket,"  in  1829,  the 
locomotive  had  made  but  little  progress  in  replacing 
the  stage-coach.  It  was  more  than  twenty  years 
after  the  introduction  of  the  Bessemer  steel  process 
before  iron  rails  ceased  to  be  made.  In  1870  there 
were  over  700  iron  blast  furnaces  in  the  United  States, 
with  an  average  capacity  of  about  5,000  tons  per  year 
each;  to-day  there  are  about  400,  with  an  average 


6  INVESTIGATING  AN   INDUSTRY 

capacity  approaching  100,000  tons  each.  The  700 
old  furnaces  and  most  of  the  companies  that  owned 
them  are  all  gone,  but  they  disappeared  slowly  and 
with  fewer  bankruptcies  than  there  would  have  been 
if  the  building  of  the  large  furnaces  had  proceeded 
more  rapidly.  The  too  rapid  building  of  railroads 
between  1866  and  1873  caused  many  receiverships 
and  reorganizations,  and  was  one  of  the  causes — if 
not  the  principal  cause — of  the  panic  of  1873  and  the 
five  years'  business  depression  that  followed.  The 
law  of  progress  is  the  law  of  the  survival  of  the  fittest; 
but  the  unfit  survive  a  long  time.  Mental  inertia 
and  conservatism  are  sometimes  good  qualities  in 
business  men.  When  electric  current  began  to  take 
the  place  of  the  mule  for  street-car  service,  the  com- 
panies that  held  to  the  mule  for  some  years  generally 
fared  better  than  those  that  adopted  electricity,  for 
the  latter  found  inside  of  five  years  that  their  machin- 
ery was  obsolete  and  had  to  be  replaced.  Those 
that  waited  got  the  experience  of  the  more  progres- 
sive without  paying  for  it. 

So  it  will  be  with  scientific  management.  The 
success  already  obtained  with  it  by  a  few  concerns, 
showing  results  as  stated  by  the  A.  S.  M.  E.  com- 
mittee, "a  reduced  cost  of  product;  greater  prompt- 
ness in  delivery  with  the  ability  to  set  and  to  meet 
dates  of  shipment;  a  greater  output  per  worker  per 
day  with  increased  wages;  and  an  improvement  in 


GENERAL   CONSIDERATIONS  7 

the  contentment  of  the  workers"  makes  certain  its 
continued  and  more  rapid  progress,  and,  say,  in 
twenty  years,  its  general  introduction. 

The  committee's  report  enlarges  on  the  necessity 
of  slow  progress.  It  says: 

The  introduction  of  modern  management  in  a 
plant  must  be  made  slowly.  The  causes  of  most  so- 
called  failures  are  principally  two:  a  failure  of  the 
executives  to  acquire  the  vital  mental  attitude,  and 
too  great  haste  in  application.  The  latter  seems  to 
be  the  dominant  one.  Your  committee  feels  com- 
pelled to  emphasize  the  danger  of  attempting  to  hurry 
any  change  in  methods  of  management.  Each  step 
of  the  work  should  be  made  more  permanent  before 
the  next  is  begun.  .  .  .  One  of  the  unfortunate 
features  of  this  great  movement  has  been  the  rise 
of  alleged  experts  who  have  been  ready  to  promise 
extravagant  results  if  they  are  allowed  to  systematize 
an  industrial  plant.  The  test  which  they  cannot 
meet  is  one  of  permanence. 

Some  of  the  causes  that  will  retard  the  rapid 
progress  of  scientific  management  are:  the  mental 
inertia  and  conservatism  of  managers  and  owners; 
the  fact  that  many  of  them  are  uneducated  and 
have  never  read  the  literature  of  the  subject; 
and  the  fact  that  as  yet  there  are  very  few  experts 
competent  to  introduce  the  new  system.  One  of 
the  correspondents  of  the  committee  writes:  "The 
trouble  is  that  there  are  not  enough  managers  with 


8  INVESTIGATING   AN   INDUSTRY 

sufficient    initiative    to    set    the    system    moving 
properly.'7 

Probably  few  of  the  readers  of  Industrial  Engineer- 
ing are  uninformed  as  to  the  general  principles  of 
scientific  management  as  related  to  the  shop,  and 
most  of  them,  we  trust,  have  some  of  the  principal 
books  on  the  subject,  such  as  Taylor  on  Shop  Manage- 
ment, Gantt  on  Work,  Wages  and  Profits,  and  Gil- 
breth  on  Motion  Study.  We  recommend  them  also 
to  read  "The  New  Industrial  Day,"  by  Wm.  C. 
Redfield,  a  book  which  gives  no  new  information  on 
shop  or  business  practice,  but  which  shows  in  a  most 
entertaining  and  inspiring  way  the  necessity  of 
scientific  management  in  the  business  of  the  future 
and  of  the  tremendous  effect  it  is  bound  to  have  upon 
the  prosperity  of  the  nation  and  the  welfare  of  hu- 
manity. From  a  chapter  on  "The  Days  of  the  Rule 
of  Thumb"  we  make  a  few  quotations  showing  how 
a  successful  manufacturer  and  business  man  views 
our  present  industrial  condition: 

"X  The  industries  of  the  nation  have  not  sprung  within 
a  man's  lifetime  from  childhood  to  heroic  size  without 
showing  signs  of  that  disregard  for  details  which 
makes  waste,  and  that  strong  striving  after  results 
which  often  pushes  to  one  side  as  a  minor  detail  the 
relative  cost  at  which  these  results  are  had.  So  side 
by  side  with  the  great  achievements  of  our  manu- 
facturers we  should  normally  look  to  find  that  the 
profits  arising  from  these  achievements  had  been  won 


GENERAL   CONSIDERATIONS  9 

at  a  higher  price  of  waste  of  all  kinds  than  it  will  be 
longer  possible  to  pay,  and  that  the  day  has  dawned 
when  a  sober  second  thought  must  be  taken  and  our 
methods  readjusted.  For  our  industrial  past  has 
truly  passed  not  to  return.  .  .  . 

The  day  of  the  "rule  of  thumb  "in  our  factories  is 
not  yet  ended,  though  its  sun  is  setting.  Many 
superintendents  manage  to-day  as  they  managed  of 
yore — true  offspring  of  the  industrial  conditions  under 
which  they  grew  up.  There  is  fearful  waste  of  energy, 
of  human  strength  and  thought,  and  even  of  life,  and 
waste  also  of  time  and  of  material  and  of  attention 
given  to  relatively  trivial  things  while  more  serious 
matters  pass  unnoticed.  We  have  depended  much 
heretofore  upon  mere  drive,  or  as  we  call  it  "hustling" 
— crowding  into  the  compressed  hours  of  busy  days 
more  and  more,  and  winning  out  by  intensity  of  effort 
and  by  dint  of  strenuous  application  rather  than  by 
the  scientific  efficiency  which  saves  all  waste  and 
applies  the  principle  of  least  effort  to  produce  the 
greater  result. 

Any  radical  change  in  factory  management  must 
be  a  gradual  evolution  out  of  that  which  has  preceded 
it.  The  present  systems  or  lack  of  systems,  with  their 
good  or  bad  points,  are  themselves  the  result  of  long 
evolution.  No  drastic  or  radical  change  in  them  can 
be  suddenly  or  even  rapidly  made  without  causing 
disturbance.  Men  have  become  accustomed  alike  to 
the  strong  and  the  weak  elements  in  the  systems  under 
which  they  work,  and  they  cling  naturally  to  that 
which  they  have  been  accustomed  to  do.  A  factory 
manager  is  a  busy  man.  From  dawn  to  dark  prob- 
lems large  and  small  press  upon  his  thought.  Questions 


10  INVESTIGATING   AN    INDUSTRY 

of  policy,  of  principle,  of  practice,  of  purchase  in 
every  form  crowd  his  hours.  Amid  these  cares,  often 
while  doing  his  best,  he  is  conscious  that  there  are 
better  ways,  but  having  only  one  man's  strength  he 
cannot  take  them  up,  especially  if  he  has  owners 
above  him  who  are  content  with  anything  so  long  as  it 
pays. 

One  more  quotation:  this  is  from  a  botanist, 
Prof.  Charles  E.  Bessey,  in  an  address  on  The  Next 
Steps  in  Botanical  Science  (Science,  Jan.  3,  1913). 
He  is  speaking  of  plants  in  the  vegetable  kingdom, 
but  the  words  might  have  been  used  by  an  engineer 
in  reference  to  industrial  "plants." 

It  seems  to  one  who  carefully  looks  over  the  field 
that  there  is  often  only  the  most  vague  notion  of  the 
relative  importance  of  the  known  facts  in  regard  to 
plants,  those  of  trivial  importance  receiving  as  much 
weight,  perhaps,  as  those  of  profound  significance.  .  . . 
We  have  all  heard  the  excusatory  remark  that  "it 
makes  little  difference  how  or  where  we  begin  the 
study  of  plants,  and  in  what  sequence  we  pursue  it." 
Yet  none  of  us  would  admit  such  a  contention  in 
regard  to  any  other  matter.  The  more  we  know  of  a 
country,  the  more  definite  are  our  ideas  as  to  what 
are  its  most  important  mountains,  rivers,  cities  and 
institutions,  and  it  is  these  that  we  feel  that  the  travel- 
ler should  see.  We  particularize  when  we  know;  we 
generalize  and  are  vague  when  we  do  not. 

"The  factory  manager  is  a  busy  man";  "he  has 
owners  above  him  who  are  content  with  anything 


GENERAL   CONSIDERATIONS  11 

so  long  as  it  pays."  Therefore  he  has  "only  the 
most  vague  notion  of  the  relative  importance  of  the 
known  facts."  He  particularizes  when  he  knows,  he 
generalizes  and  is  vague  when  he  does  not.  He  may 
have  introduced  scientific  management  into  the  labor 
department  of  his  shop,  and  it  pays;  he  and  the 
owners  are  content;  he  knows  the  labor  question,  he 
particularizes  on  it;  but  he  does  not  know  the  power 
plant  costs  nor  its  wastes,  the  designing  department, 
the  purchasing  department,  the  selling  department, 
nor  the  prospects  of  the  market,  and  has  only  the 
most  vague  notion  of  their  relative  importance. 

In  the  beginning  of  this  article  we  said  that  scientific 
management  relates  to  every  element  in  industry 
and  that  labor-saving  management  is  only  one  of 
many  elements.  It  is  the  purpose  of  this  article  and 
those  that  follow  to  consider  those  elements  of  in- 
dustry which  are  not  directly  related  to  labor  saving. 

The  foundation  of  scientific  management  is  scientific 
investigation,  and  by  scientific  investigation  of  an 
industry  we  mean  "the  critical  observation,  accurate 
description,  analysis  and  classification  of  all  industrial 
and  business  phenomena"  relating  to  the  industry, 
systematic  recording  and  plotting  of  data,  drawing 
conclusions  from  them,  predicting  future  progress 
under  existing  conditions  and  under  proposed  changed 
conditions. 

The  importance  of  investigating  other  problems 


12  INVESTIGATING   AN   INDUSTRY 

than  those  of  labor  saving  and  of  wages  may  be 
shown  by  the  following  hypothetical  case,  which  is 
based  upon  facts  within  the  writer's  experience.  A 
certain  business  showed  the  following  statistics  of 
two  years'  business: 

A. — Investment  in  land,  building  and  equipment $100,000 

B. — Working  capital,  cash,  work  in  progress,  stock  in  - 

trade,  etc.,  less  liabilities $100,000 

First  Second 

Year  Year 
Interest,    repairs,    depreciation,    taxes, 

etc.,  on  A $15,000  $16,000 

Interest  on  B,  and  on  loans  in  second 

year 5,ooo  8,000 

Material 100,000  190,000 

Labor 100,000  190,000 

Superintendence 20,000  25,000 

Fuel,  light,  water,  etc 10,000  12,000 

Designing,  drafting,  etc 10,000  15,000 


Total  factory  cost .  .  * $260,000  $456,000 

Billed  to  sales  dept.  at  fixed  per  cent,  of 

list  price 250,000  500,000 

Apparent  loss  in  factory 10,000  ...... 

Apparent  gain  in  factory 44,000 

Sales 350,000  700,000 

Cost  of  selling,  advertising,  storage,  etc .      105,000  175,000 

Net  proceeds  of  sales $245,000  $525,000^ 

Billed  from  factory  at 250,000  500,000 

Loss  $5,ooo     Gain  $25,000 

Factory  loss  or  gain "  10,000  44,000 

Total  loss  or  gain Loss          $15,000     Gain  $69,000 

No  account  is  given  therein  of  value  of  unfinished ~ 
work  or  of  unsold  goods  at  the  beginning  and  end  of 
each  year,  as  these  are  supposed  to  balance. 

The  chief  fact  in  the  above  statistics  is  that  the 


GENERAL   CONSIDERATIONS  13 

Iproduct  in  the  second  year  was  twice  as  great  as  that 
Un  the  first  year.     The  labor  and  material  costs  per 
unit  of  product  were  practically  the  same  in  both 
years,  since  most  of  the  men  were  on  piece  work  or 
task  and  bonus.     On  account  of  the  larger  produc- 
tion  some  economy  was   effected  in   the  purchase 
of   material,    making   its   cost   $190,000   instead   of 
$200,000,  and  the  increased  production  enabled  some 
saving  of  labor  cost  to  be  made  by  having  fewer  tool 
makers,    etc.,   in   proportion   to   the   product.     The 
doubling  of  the  product  involved  the  borrowing  of 
some  money,  a  slight  increase  in  repairs  and  in  fuel 
and  light,  and  some  increase  in  foremen  and  drafts- 
men.    The  factory  was  well  managed  both  years. 
The  sole  cause  that  it  made  $44,000  gain  the  second 
year  as  compared  with  $10,000  loss  the  first  year  is 
that  the  sales  department  called  for  twice  as  many 
goods.     Whether  this  was  due "  to  the  condition  of 
the  market,  to  greater  efficiency  of  the  sales  depart- 
l  ment,  or  to  the  fact  that  in  the  second  year  the  sales 
I  increased  on  account  of  the  increased  reputation  of 
I  trip*  goods,  or  on  account  of  the  advertising  and  other 
\efforts  made  by  the  sales  department  in  the  first 
•lyear,  the  results  not  appearing  until  the  second  year, 
^has  nothing  to  do  with  the  management  of  the  factory. 
Increasing  the  production  could  not  improve  matters, 
Jbecause  the  production  was  all  that  could  be  sold. 
The  stockholders  receiving  these  statistics  would 


14  INVESTIGATING    AN    INDUSTRY 

naturally  be  well  pleased  with  the  second  year's  re- 
port, and  they  would  scout  the  idea  of  an  investiga- 
tion by  a  management  expert.  But  suppose  one  of 
them,  farther-sighted  than  the  others,  discovers  that 
the  business  is  in  a  very  dangerous  condition,  that 
a  competitor  is  about  to  enter  the  field  the  following 
year,  and  that  there  is  likely  to  be  a  large  cut  in  prices 
and  not  enough  business  for  all.  What  is  to  be  done 
in  view  of  this  prospect?  The  occasion  calls  for  a 
scientific  investigation  of  a  much  broader  scope  than 
one  that  relates  only  to  labor-saving  management. 
What  should  be  done  under  the  circumstances  may 
well  be  the  subject  of  another  chapter,  in  which  the 
hypothetical  case  is  treated  in  narrative  form  as  if 
it  were  an  actual  one. 


CHAPTER  II 
A  Business  Diagnostician 

AFTER  further  explanation  of  the  impending  com- 
petition and  the  threatened  lowering  of  prices,  it 
was  conceded  by  all  the  directors  that  the  business 
would  probably  show  a  loss  the  following  year  unless 
something  radical  were  done  to  prevent  it,  but  there 
was  no  agreement  as  to  the  remedy.  Among  the 
suggestions  made  were:  Driving  the  rival  out  of 
business  by  cut- throat  competition;  consolidating 
with  him  or  buying  him  out  (something  was  said 
here  about  the  Sherman  law) ;  extending  the  market 
by  more  extensive  advertising  and  by  the  employ- 
ment of  more  agents  and  salesmen;  trying  to  build 
up  a  foreign  market;  cheapening  the  cost  of  manu- 
facture; cutting  down  overhead  expenses;  facing 
the  probable  loss  in  the  coming  year,  hoping  that  it 
would  be  made  up  the  year  after  by  the  normal  in- 
crease in  the  demand;  finding  some  other  thing  to 
manufacture  which  would  be  more  profitable.  A 
critical  analysis  of  each  suggestion  showed  that  each 
was  open  to  objection;  that  not  one  was  anything 
more  than  a  suggestion.  Finally,  one  director  pro- 
posed that  the  discussion  be  suspended  and  that  a 

15 


16  INVESTIGATING    AN   INDUSTRY 

committee  be  appointed  to  study  all  the  suggestions 
and  report  on  them  at  the  next  meeting. 

Another    director    made    a.  different   proposition. 
He  said,  "There  is  a  man  in  this  town  who  has  be- 
come a  specialist  in  getting  manufacturing  concerns 
out  of  difficulties.     He  is  a  stockholder  in  several' 
concerns    that   he   has   helped    to   make   profitable. 
Suppose  we  ask  him  to  meet  us  and  advise  us  what  to 
do.     His  fees,  I  believe,  are  large,  but  it  may  pay  us' 
to  employ  him." 

The  suggestion  was  debated  awhile  and  then  it 
was  agreed  to  ask  him  if  he  would  visit  them  and  have 
a  preliminary  talk  over  the  matter.  He  was  soon 
found  by  means  of  the  telephone,  and  an  automobile 
brought  him  to  the  office  in  a  few  minutes.  After 
introductions  the  situation  was  explained  to  nirrb 
and  he  was  asked  if  he  was  in  position  to  stud^-^je  ju 
matter  and  find  a  proper  remedy.  The  gistjof  his 
reply  was  about  as  follows: 

"My  profession  is  that  of  doctor  of  medicine,  but^ 
I  retired  from  active  practice,  in  which  I  was  engaged  * 
for  30  years,  about  five  years  ago,  and  my  son  is  my' 
successor.     I  had  inherited  a  considerable  interest 
in  the  manufacturing  concern  of  Blank  &  Co.,  In-, 
corporated,  and  in  that  way  obtained  some  knowl- 
edge of  factory  troubles.     Five  years  ago,  when  the 
concern  was  in  financial  straits,  I  was  a  director  and 
I  had  thrust  on  me  the  job  of  getting  it  again  on  a 


A   BUSINESS   DIAGNOSTICIAN  17 

prosperous  basis.  When  I  was  a  doctor  I  had  the 
habit,  when  there  was  a  difficult  case  on  hand,  never 
to  make  a  hasty  diagnosis,  but  to  keep  the  patient 
quiet  for  a  few  days  to  give  me  a  chance  to  study  all 
his  symptoms.  -I  -made  out  a  list  of  all  the  possible 
things  that  might  be  the  matter  with'him,  and  then 
struck  out  one  at  a  time  each  item  which  was  nega- 
tived by  the  absence  of  the  symptoms  pertaining  to 
it.  In  this  way  the  list  was  narrowed  to  three  or 
four  items.  I  then  made,  a  second  examination  of 
the  patient,  using  all  of  the  most  modern  methods 
and  instruments,  including  chemical  analysis  and  the 
microscope.  If  by  this  time  the  diagnosis  and 
prognosis  were  incomplete,  I  called  in  one  or  two 
specialists  in  consultation,  and  in  this  way  a  conclusion 
was  reached  as  to  the  remedies  to  be  applied.  When 
I  tackled"  the  job  of  Blank  &  Co.,  I  did  the  same 
thing.  I  made  a  list  of  all  the  possible  diseases  with 
Avhich  the  concern  might  be  afflicted,  struck  out 
torn  the  list  one  « disease  after  another  as  non- 
existent, had  statistical  records  and  graphic  charts 
i  made  of  everything  that  might  have  a  bearing  on 
The  company's  troubles,  and  called  in  a  'couple  of 
experts  on  certain  specialties  with  which  I  was  un- 
familiar. The  result  you  know.  Without  obtaining 
any  additional .  capital,  the  concern  has  paid  good 
dividends  for  the  last  three  years. 
"In  answer  to  your  question  how  I  obtained  the 


18  INVESTIGATING   AN   INDUSTRY 

knowledge  requisite  to  enable  me  to  make  a  list  of 
industrial  diseases,  I  may  refer  to  another  habit  of 
mine.  During  thirty  years'  travel  on  our  suburban 
railroads  I  have  observed  the  new  factories  that  were 
built,  and  noticed  that  while  some  of  them  grew 
from  small  beginnings  to  great  concerns,  others,  and 
the  majority  of  them,  either  did  not  grow  at  all,  or 
elseTchanged  hands,  or  remained  idle  for  a  year  or 
two  before  finding  new  tenants.  Many  of  my 
patients  were  owners  and  managers  of  these  factories, 
and  some  of  them  I  had  to  treat  for  nervous  prostra- 
tion caused  by  worry  about  their  business.  It 
seemed  to  me  that  industrial  concerns  had  about  as 
maii}J  different  diseases  and  causes  of  disease  as 
human  beings,  and  curiosity  led  me  to  inquire  into 
these  causes.  Some  of  these  causes  might  be  called 
pure  luck,  or  accident,  which  no  human  foresight  could 
have  prevented,  but  even  in  these  cases  there  was 
no  insurance  provision  against  bad  luck  or  accident. 
We  put  up  fire  escapes  on  our  buildings,  we  guard 
our  machinery,  and  we  insure  our  factories  and  our 
lives,  but  we  take  no  insurance  against  a  financial 
crisis,  against  strikes,  or  against  ruinous  competition/ 
Besides  luck  and  accident,  I  have  found  ^certain 
microbes  that  affect  industrial  concerns.  Some  of 
*tliese  are:  (i)  Conceit,  the  owner  thinking  that  he 
jbiows  his  own  business  and  that  no  one  else  knows 
it  as  well  as  he  does.  (2)  Ambition,  or  too  great 


A   BUSINESS   DIAGNOSTICIAN  19 

progressiveness,  trying  to  be  the  leader  in  new 
/  things.  (3)  Inertia,  or  too  little  progressiveness, 
waiting  till  your  rivals  succeed  with  a  new  thing' 
before  investigating  whether  you  ought  not  to  have 
it.  (4)  Recklessness,  making  changes  in  the  busi- 
ness without  counting  the  cost.  (5)  Fickleness,  the 
lack  of  'stick-to-ativeness.'  The  successful  man 
"like  a  postage  stamp,  sticks  to  a  thing  till  he  gets 
there."  (6)  Stupidity,  too  great  ' stick- to-ativeness.' 
Sticking  to  a  thing  after  it  has  proved  a  failure.  (7) 
Nepotism,  putting  one's  relations  into  prominent 
positions  just  because  they  are  relations. 

"Now  these  seven  microbes,  and  there  may  be 
others,  are  not  possessions  of  the  business  itself,  but 
of  its  owners  or  directors.  Their  investigation  is 
a  study  in  psychology.  Next  in  order  is  a  psycho- 
logical investigation  of  the  general  manager,  and  of 
the  superintendents  of  the  sales  department  and  of 
the  production  department,  and  of  the  organization 
that  binds  them  together. 

"My  method  of   investigating  an   industry   thus 

begins  with  a  diagnosis  of  the  possible  diseases  of 

*  the  human  elements  in  charge  of  the  industry.     When 

this  is  finished  I  then  take  up  the  material  elements, 

of , which  the  general  headings'.on  the  list  are:    Prod- 

,  uc£,  location,  process,  buildings,  machinery,  power, 

organization,  statistics,  finance. 

"Besfdes  my  work  with  Blank  &   Co.,  I  have' 


20  INVESTIGATING    AN    INDUSTRY 

been  called  in,  as  you  have  been  informed,  to  help 
four  other  concerns  out  of  trouble,  and  in  all  four 
cases  I  have  been  reasonably  successful.  I  had  no 
special  knowledge  of  any  of  these  businesses.  I 
simply  used  the  method  of  diagnosis  that  I  have 
described,  called  in  specialists  for  advice  when  they 
were  needed,  including  skilled  accountants  and 
statisticians,  as  well  as  machinery  experts,  and  made 
a  written  report  of  my  conclusions  and  those  of  my 
expert  assistants.  Now  if  you  wish  me  to  tackle 
your  concern  in  the  same  way,  I  am  ready.  I  make 
no  guarantee  or  promise  that  I  will  be  successful. 
When  I  was  a  doctor  of  medicine,  I  did  not  cure  all 
my  patients.  But  I  warn  you  that  my  first  work 
will  be  a  psychological  investigation  of  the  board  of 
directors,  and  after  Ihat  of  the  general  manager  and 
the  superintendents.  It  will  be  a  thorough  hunt  for 
the  microbes.." 

The  chairman  of  the  board  replied,  "I  think  we 
are  all  favorably  impressed  with  what  you  have  told 
us,  but  as  one*1  of  the  microbes  that  you  have  named, 
recklessness,  is  one  we  especially  wish  to  avoid,  we 
wish  to  get  an  idea  of  what  this  investigation  is  going 
to  cost.  What  are  your  fees  and  those  of  your 
assistants?" 

The  "diagnoser"  replied,  "When  I  was  a  doctor, 
I  had  the  habit  of  charging  what  the  market  would 
bear;  that  is,  I  charged  rich  patients  more  than  poor 


A   BUSINESS  DIAGNOSTICIAN  21 

ones;  so  before  I  answer  your  question,  I  would  like 
you  to  tell  me  at  what  price  you  value  your  stock." 
The  chairman  replied,  "We  all  paid  par  for  our 
stock,  and  on  the  basis  of  last  year's  report  we  think 
it  should  be  worth  120,  but  since  the  future  market 
conditions  do  not  look  favorable,  perhaps  it  is  not 
worth  over  80.  In  fact,  I  would  be  glad  to  sell  out 
at  80."  To  this  the  diagnoser  .answered,  "I  cannot 
fix  a  definite  charge  for  my  services  because  it  is 
impossible  for  me  to  know  how  much  work  I  shall 
have  to  do,  nor  can  I  form  any  idea  of  what  the  value 
of  my  work  will  be  to  you  when  it  is  done.  I  do  not 
charge  a  per  diem  fee.  When  I  was  a  doctor  I  some- 
times got  $2  for  attending  to  a  case  three  miles  out 
in  the  country,  and  I  have  got  $500  for  one  hour's 
time  on  a  major  surgical  operation.  I  will  make 
the  same  proposition  to  you  that  I  made  to  the  last 
three  concerns  that  I  treated.  It  is  this:  That 
you  contract  to  give  me  an  option  on  20  per  cent  of 
your  whole  capital  stock  at  90  per  cent  of  the  par- 
value  per  share,  the  option  to  be  exercised  by  me  at 
any  time  within  two  years.  If  I  take  the  shares 
and  pay  for  them,  my  fee  is  the  increased  value  of 
these  shares  above  90  per  cent  at  the  time  that  I 
take  them.  If  I  don't  take  the  shares,  then  my  fee 
is  nothing." 

After  some  discussion  of  these  terms,  they  were 
accepted  and  the  doctor  said  he  would  like  to  meet 


22  INVESTIGATING   AN   INDUSTRY 

the  directors  ofi  a  certain  day  of  the  next  week  to 
begin  his  psychological  investigation.  In  the  mean- 
time he  gave  them  a  list  of  questions  that  he  wished 
them  to  answer  concerning  the  " microbes"  that 
might  possibly  affect  the  personnel  of  the  Concern. 
He  asked  them  to  meet  together  before  he  met  them 
and  agree  upon  written  answers  to  these  questions 
so  as  to  save  time  which  might  be  taken  up  in  vague 
discussions.  He  also  asked  them  to  prepare  a  statis- 
tical statement  of  the  sales  in  each  month  of  the  last 
two  years  of  each  branch  of  their  product  and  a 
statement  from  the  sales  manager  as  to  the  expected 
sales  in  each  month  of  the  coming  year  (a)  on  the 
basis  of  the  rival  not  having  entered  the  market, 
and  (ti)  on  the  basis  of  the  rival  having^  entered  the 
market  and  doing  his  best  to  make  sales.' 

At  the  meeting  the  following  week  the  written 
statements  were  presented.  The  reports  about  the 
microbes  were  as  follows:  (i)  Conceit. -i—u We  don't 
think  we  know  our  own  business,  in  fact,  we  know 
that  we  don't  know  it.  The  founder  of  the  business, 
who  knew  all  about  it,  is  dead.  We  got  into  the 
business  as  investors,  knowing  approximately  nothing 
about  it.  We  have  had  to  depend  on  our  general 
manager  for  information."  (2)  Ambition. — "We  do 
not  think  we  are  afflicted  with  that.  We  would  be 
satisfied  with  a  reasonable  growth  of  the  business 
and  moderate  dividends."  (3)  Inertia. — "We  plead 


A   BUSINESS   DIAGNOSTICIAN  23 

guilty.  As  long  as  the  business  seemed  to  be  pro- 
gressing steadily,  we  did  not  take  the  trouble  to  find 
what  our  rivals  were  doing."  (4)  Recklessness*.  (5) 
Fickleness..  (6)  Stupidity.  (7)  Nepotism. — "If  we 
have  any  of  these  microbes,  we  are  not  aware  of  it." 

Th'e  diagnoser,  after  reading  this  report,  said  that 
his  psychological  investigation  of  the  directors  was 
now  complete,  and  he  believed  that  they  had  properTy 
diagnosed  their  own  case  and  that  the  microbe  ^was 
inertia.  "Now  I  want  your  opinion  of  the  general 
manager,"  said  he.  "The  general  manager,"  said  the 
chairman,  "is  a  man  whose  mind  runs  on  one  track. 
We  believe  him  to  be  an  excellent  man  in  everything 
relating  to  the  factory.  He  is  careful  about  pur- 
chasing; he  has  a  thorough  system  of  cost  accounts; 
he  has,  we  believe,  the  most  modern  and  best  ma1- 
chinery  and  the  latest  notions  about  scientific  man- 
agement, such  as  the  planning  room  and  functional 
foremanship.  We  had  a  scientific  management  expert 
here  recently  who  told  us  that  everything  was  work- 
ing admirably.  We  do  not  think  the  man  could  be 
improved  on  as  a  factory  man,  and  he  gives  us  no 
trouble  whatever.  His  reports  to  us  each  month 
are  cl£ar  and  precise  and  they  check  up  with  the 
statistics  of  the  accounting  department,  but  the  man 
seems  to  have  no  notion  of  how  to  push  the  selling 
department.  He  trusts  entirely  to  his  salesmen, 
and  we  have  never  known  him  to  originate  a  new 


24  INVESTIGATING   AN   INDUSTRY 


selling  idea."  -The  general  manager  was  then  brought 
into  the  conference,  asked  a  lot  of  questions-,. and« 
proved'himself  to  be  just  the'  kind  of  man  trie  chairman 
of  the  board  had  described  him  to  be.  He  was  then 
asked  the  questions,  **ls  your  factory  properly 
adapted  to  the  work  that  is  done  in  it?  Is'  it  01 
-  the  right  shape,  size,  arrangement  of  rooms?  Is  it 
properly  lighted  and  heated,  and  have  you  proper 
facilities  for  moving  materials  around  the  factory?" 
To  all  these  questions  he  replied,  "Yes."  The 
factory  was  new,  built  according  to  the  latest  ideas, 
and  he  could  not  suggest  any  improvements  that  it 
needed.  The  power  plant  and  methods  of  \  trans- 
mission of  jpower-wete  also  all  that  could  be  desired. 
The  next  question  was,  "Is  the  factory  suitable  for 
any  other  kirld  of  manufacturing  business?  "  " \yhy," 
said  hej/  it  is  suitable  for  almost  anything.  Jt  is  three 
stories  high,  with  14  feet  clear  distance  between 
vfloors,  unusually  well  lighted  on  all  four  sides,^has 
heavy  a^ncft 'substantial  floors,  and^almost  any  Alight 
manufacturing  business  could  be  carried  on  in  it." 
He  also  reported  ^that  the  machinery  wassail  up-to- 
date  and  was-  in  good  condition.  The  next  question\ 
I  was,  "Have  you  any  statistks  ofHhe-lpa.d  factor  of 
dach  of  your  machines?"  He  replied,  '"I  don't 
know  what  you  mean  by  load  factor."  "By  load 
factor  I  mean  this:  Your  working  time  is  10  hours 
a  day,  say  250  hours  per  month.  If  a  certain  machine 


A   BUSINESS   DIAGNOSTICIAN  25 

runs  250  hours  in  a  month  or  10  hours  every  day  in  a 
month,  then  its  load  factor  is  100  per  cent,.  If  it 
runs  only  125  hours  in  a  month  of  .250  werking  hours, 
then  its  loaji  factor  is  50  per  cent,  I  would  like  to 
have  a  statement  concerning  each  of  your  larger 
machines  as^to  Svhatlts  load  factor  was  each  month 
during  the^past  year.  Can  you  get  me  the  figure's?  " 
The  manager  replied,  '"I  have  not  got  the  figures  in 
just  that  shape,  but  they  can  be  compiled  from  the 
time  cards,  as  each  time  card  shows  the  number  of 
the  machine  and  the  number  oi  hours  it  ran  on  each 
job.  By  adding  these  figures  together  on  an  adding 
machine  we  could,  no  doubt,  get  up  a  lead  factor 
statement  such  as  you  desire."  He  was  then  instruct- 
ed to  get  up  thisystatement  and  have  it  ready  within 
a  week. 
The  doctor"  then  took  up  the  question  of  the  extent 

'of  market  df  the  product,  and  he  founcUa-  lack  of 
systematic  knowledge  as  to  the  total  demand  of  the 
country  for  tHe  kinds  of  goods  produced,  and  con- 
sequently a"  lack  of  knowledge  as  Jo  what  prospects 
the  factory  would  have  of  increasing  its  sales  if  prices 
were  reduced  or  if  greater  activity  was  pu#  inrto  the 
selling  department.  He  then  told  the  directors  that 

(as  soon  •  as  they  could  give  him  any  ]ight~on  this 
subject,  he  would  start  an  independent  investigation, 
using  outside  business  experts  for  the  subject,  so 
that  he  could  form  an  idea  as  to  the  market  con- 

f: 


26  INVESTIGATING  AN   INDUSTRY 

ditions,  and  appointed  a  day,  two  weeks  removed, 
for  another  meeting.  "Meantime,"  said'  he,  "I  am 
going  to  give  you  another  list  of  questions  for  youv 
to  answer.  First,  what  is  your  product?  Describe 
its  several  varieties,  shapes,  etc.  Second,  why  do 
you  make  this  product?  Why  not  make  something 
else?  Why  do  you  not  concentrate  and  make  fewer 
varieties?  Why  -do  you  not  expand  and  increase 

,  the  number  of  varieties?    Why  do  you  put  so  fine 
a  finish  on  your  goods?    Would  not  a  cheaper  finish 

•  and  lower  price  increase  the  sales  so  as  to  bring  more 
profits?  Why  do  you  not  improve  the  quality  of  the 
products,  and^gei  a  higher  price  for  them  and  a  better 
^  reputation  in  the  market,  which  will  increase  the  sales? 
Have  you  considered  what  other  kinds  of  products 
might  be  made  in  your  factory  in  order  to  increase 
its  load  factor,  especially  in  the  seasons  when  k  ^s 
running  light?  Have  you  considered  whether  or 
not  the  space  available  in  your  factory  is  fully  utilized, 
or  whether  or  not  from  two  to  four  times  its  present 
product  could  not  be  turned  out  without  increasing 
either  the  floor  space  or  the  power  plant?  While 
you  are  preparing  the  answers  to  these  questions,  I 
will  be  studying  such  other  matters  relating  to  the 
business  as  may  occur  to  me,  and  prepare  another 
set  of  questions  which  I  will  give  you  at  your  next 
meeting." 
The  meeting  then  adjourned. 


CHAPTER  HI 

*•  j       TTze  Diagnosis;    The  Factory 

-j 
T&E  next  day  the  "diagnoser"  called  the  general 

manager  on  the  telephone  and  asked  him  when  it 
would  be  convenient  for  him  to  have , an  hour's  con- 
ference in  regard  to  the  factory.  The  conference  was 
held\hat  afternoon.  After  some  general  conversa*- 
tion  on  the  nature 'of  the  business,  the  imputation  of 
its  products,  its  history  and  its  prospects,  the  doctor 
eaid:  "It  appears  to  me  that  your  condition  is 
about  that  of  a  famous  athlete  whom  I  treated  some 
years  ago, '  who  was  preparing  himself  for  a  great 

/contest.  Physically  he  was  about  95  per  cent  per- 
fect, and  mentally  about  90  per  cent.  It  was  neces- 
sary to  get  him  up  to  98  per  cent  in  both  if  he  >was  to 
beat  the  world's  record.  In  examining  him  I  took 
nothing  for  granted.  I  assumed  the  possibility  that 
weakness  might  exist  in  any  one  of  his  muscles  or 
organs,  and  that  any  one  of  the  hundreds  of  causes 
of  lack  of  physical  or  mental  perfection  might  also 
exist.  I  sounded  him  from  his  scalp  to  his  toes,  I 
took  his  pulse,  blood-pressure,  respiration,  and  re- 

,  action  time.  I  looked  into  his  eating,  sleeping,  ex- 
eltising,  training,  and  all  his  habits.  I  got  all  the 

27  r 


28.  INVESTIGATING    AN    INDUSTRY 

subjective  as  well  as^the  objective  symptoms,  and  I 
applied  to  him  all  the  ^psychiatric  tests  that  are  down 
in  the  books.  When  I  got  through  with  the  examina- 
tion I  had  found  very  little  that  was  wrong  with 
him;  a  little  overtraining,  some  errors  of  diet^  slight 
fatigue-poisoning  and  the  like,  and  the  mental  "or 
psychical  defects  and  subjective  symptoms, -such  as 
alternations  of  fear  and  of  overeonfidencey  nervous- 
ness, lack  of  will-power  to  draw  on  his  reserve  *  of 
energy  of  "second  wind,"  were  all  accounted  for  by 
the  fatigue-poisoning.  I  got  him  up  to  98  per  cent 
and  he  beat  the  record. 
•"Iii  mV  investigation  of  this  businesfs  I  wish  to, 

. \  -  i  -^ 

take  nothing  for  granted.     There  may  be  very  little 
wrong  with  itH  but  we  must  examine  every  organ  of. 
every  department,  no  matter  how  much  confidence 
you  or  the  directors  may  have  in  its  perfection,  to 
see  if  there  may  possibly  be  anything  wrong  with-it." 
From  what  "I  have  already  learned  it  seems' probable  / 
that  I  shall  find  little  if  anything  wrong  with  the 
factory  or  with  the  method  of  conducting  operations 
in  it,  but  to  remove  all  doubts  on  the  subject  I  wish 
to  investigate  both*  the  factory  and  the  methods  of^ 
operation.     I  have  here  in  my  notebook*  a  list  of  over  " 
a  hundred  separate  items;  some  relating  to  the  pro- 
duction and  some  to  the  accounting  and  sales  depart- 
ments, each  one  of  which  I  wish  to  consider  before 
7  j 

the  next  meeting  of  the  directors.     I  will  take  up  the 


THE  DIAGNOSIS;  THE  FACTORY  ,  29 

factory  items  now,  and  you  will  assist  me  greatly  if  / 
you  can  give  me  brief  answers  to  the  questions  I  shall 
ask  concerning  these  item's. 

"First  on  the  list  is^the  location  of  th£  plant.  Is 
it  a  proper  one,  considering  its  nearness  to  arid 
facilities  Ifor 'getting  the  raw  materials,  the  supply 
of  skilled  and  unskilled  labor  in  the  immediate 
vicinity,  good  climate  and  comfortable  homes  and 
cheap  markets  for  the  wt5rkmen,  so  that  you  can  secure 
and  keep  the  b¥st  grade  of  workmen,  nearness  to 
the  market  for  your  products  and  favorable  freight 
rates  to  more  distant  markets?  Are  any  of  your  com- 
petitors likely  to  find  a  better  location?" 

.  A  f ew-  minutes'  talk  on  these  questions'  satisfied 
,the  doctor  that  the  location  was  an  exceptionally  good 
one. 

The  next  set  of  .cjuestions  related  to  the  buildings. 
The  general  manager  was  asked  to  furnish  a  blue- 
print showing  the  ground  plan  and  sectional  eleva- 
tion of  the  buildings,  with  a  statement  off  the  floor 
area  .of  each  department,  and  to  answer  some  ques- 
tions relating  to  the  suitability  of  the  buildings  to 
the  work  now  done  in  them  and  to  otherkinds  of  work 
which  might  be  done  in  the  future;  also  as  to  the  extent 
of  vacant  space  as  yet  unoccupied  in  the  several  rooms, 
as  to  the* prospect  of  utilizing  this  space,  and  as  to 
the  possible  need  of  extra  space  for  future  extensions. 
Other  questions  related  to  the  lighting,  natural  and 


30  INVESTIGATING   AN   INDUSTRY 

artificial,  of  these  rooms,  the  heating  and  ventilation, 
protection  against  fire  and  other  accidents,  sanitary 
appliances,  first-aid  hospital,  rest-rooms  for  women, 
etc.  The  answers  to  .these  questions  led  to  the 
conclusion  that  the  buildings,  "their  arrangement, 
etc.,  were  almost  ideal  for  the  purpose  for  which  they 
were  now  used,  and  suitable  for  ^almost  any  light 
,  metal-goods  business,  but  that  at  presejit  t^ey  were 
'  much  larger  than  the  present  extent  of  the  business 
required,  and  on  this  account  cost  morp  for  heating 
-  in  winter-time  and  involved  a  larger  investment  of 
capital  than  would  a  .building  of  ^a  size  better  pro- 
portioned vt6  the  present  *  extent  of  die  business. 
They  were,  as  the  manager  said,  built  with  a  vjew^ 
tp  doing  in  them  a  much  larger  business,  which  was 
expected  in  the  near  future.  A  .  -  \ 

""I  understand,"  said  the  doctor,  "from  my  con- 
versation with  the  board  of  directors,  that  the  business 

V    "  \ 

is  likely  to  meet  a  great  deal  of  competition  n€xt 

year  and  that  prices  will  be  lowered.     In  that  case, 
there  is  likely  to  be  more  idle  time  for  machinery* 
and  less  call  for  utilization  of  the  vacant  spaces  than 
there  now  is."     "That  is  exactly  the  case,"  replied 
the  general,  manager.     "Well,  what  provision  have 
you  made  against  that  state  of  affairs?  "  "We  have ' 
made  none  as  yet,"  said  the  manager;  "that  is  what 
we  are  now  getting  ready  to  consider."     "Have  you 


X 


THE  DIAGNOSIS;  THE  FACTORY  31 

made"  an}?  investigations  in  regard  to  finding  out  what 
other  lines  of  products  the  factory  might-engage  in?" 
"^Jo,  I  haveCnot,"  said  the  general  manager.  "Well, 
let  us  pass  that  subject  for  the  present  and  we  will 
l,ake  it  ''up""  at''  the  directors'  meeting.  Let  us  now 
^consider  some  of  the  other  things  on  my  list.  The 
next  is  organization.  I  understand  that  you  have  the 
.jisual,  organization  of  directors  at  the  head,  then 
vou  as  general  manager  in  charge  of  the  whole  business 
a'nd  reporting  jrnly  to  the  board  of  directors;  that 
you  are  in  charge  of  the  selling  and  accounting  de- 
partments as  well  as  of  the  factory,  and  that  all 
superintendents,  foremen,  sales  agents  and  safes- 
men  are  ^directly  in  your  charge."  "That  is  the 
case,"  saic|  the  general  manager. 
.  cr  "The  next  subject  I  have  on  my  list  is  Material, 
&ith  these  items  under  it:  Purchasing  department;  . 

"*  **  'V^ 

purchasing  system  j  ^Specifications,  inspection  and  (  , 
*tests;  keeping  track  of  -markets  arid  -quotations^  > 
scrap,  disposition  ofj  ^by-products,  utilization  or 
disposal  -of;  origin  and  handling  of  requisitions. 
The  next  subject  is  Stored  and  Supplies,  and  under  it 
I  havej  Duties  of  stores'  clerk;  inventory  of  supplies; 
minimum  quantity  |Uowed  before  ordering  new  sup- 
plies; bins,'  shelves,  facilities  for  handling."  These 
subjects  were  discussed  at  some  length  and  the 
doctor  expressed  his  satisfaction  with  this  branch 
of  the  management. 


32  INVESTIGATING   AN   INDUSTRY 

."The -next  subject  on  my  list 'is  Men,-  anoS  with 
the ,  following  items :  '  Selection  and  hiring  of  men ; 
fitting  men  into  the  right  places;  promotion;  training 
qf  young  workers;  training  of  leaders;  management 
of  green  workers;  incentive;  discipline;  accident 
s  insurance;  prevention  of  accidents;  human  wel- 
fare." The,  manager  showed  that  he'was  q\iite  up- 
to-date  in  all  these  ^matters  and  promised  at  the 
next  opportunity  to  take  the  doctor  around  and 
show,  him  in  detail  just  whai  was  being  done  in  re- 
gard to  the  treatment  of  •  me^n  and  the  incentives 
offered  them  to  ^main  connected  with  ,the^  concern. 
"The  next  subject  on  my  Nst,"  said  'thje  jdpctor/ 
.  "is  Scientific  Management.  What  have  you  to  say 
'about  that?"  "Why,  that  is  my  hobby,"  said  the 
general  manager,  "I  was  with  Fred. ^Taylor  at  Bethle- 
hem and  got  a  good  training  under  Turn,  and  have 
kept  track'  of  his  work  and  with  that  of  .Gantt,  Earth 
and  Hathaway  ever  since.  I  meei  them  occasionally 
and  they  post  me  as  to  their  most  recent  ideas.  Wev 
had  an  advantage  over 'most  concerns  in  installing 
scientific  management,  for  we  started  it  when  the 
first  designs  were  made.  We  located  on  the  original 
plans  the  tool  room,  store  room,  and  planning  room, 
laid  out  the  course  of  -material  from  the  receiving 
platform  to  the  shipping  room,  and  planned  the 
means  of  handling  it  by  cars,  cranes,  elevators  and 
trucks  so  that  it  could  be  handled  with  a  minimum 


THE  DIAGNOSIS;  THE  FACTORY  33 

of  manual  labor.  If  you  wish  to  take  the  time  now 
I  will  go  into  detail  in  regard  to  the  management  of 
the  production  end  of  the  business." 

"We  will  postpone  that  for  the  present,"  said  the"' 
doctor,  "but  I  wish  to  check  off  the  items. I  have  ' 
listed^ under   'Scientific  Management  inside  of  the 
shop]'  to  see  if  you  have'  all  thesfe  items:  Planning 
'ropm;    toolroom;    tool  grinders;  ift&ss&iger  service; 
s^^idard  shapes  of  tools;   functioft&l  foremen;  rout- 
ing man;   disciplinarian;   time  study;  xnotion  study; 
instruction  cafdsj  standardized  operations;  mnemonic 
symbols.;  fatigue- study;    task  and  bonus;   statistics   1 
and  plotting  of  results,  graphic  daily  balarlce." 

,"We  haye  all  of  these  and  a  few  more/'  said  the 
manager.  ,'"but   thesex  are   only    the   machinery   of 
scientific  management  ]   the  real  essence  of    it  is    a 
/mental  attitude,  a  state  of  mind,  ( a  disposition  which 
is  ndt  satisfied  with  the  possession  of  mere, machinery  ' 
of , a  system,  but  is  always  watching  ,to  discover  some- 
thing that  can  be  improved.     There  are  two  things 
you  had  letter' add  to  your  list,  doctor,  the  effect  of 
'  scientific  management  upon  the  earnings  and  upon 
.  the  general  welfare  of  the  men,  and  its  effect  upon  the 
cost  of ''production.'    If  it  does  not  both  increase  the 
men's  earnings  and  decrease  the  total  cost  of  produc- 
tion at  the  same  time,  then  it  is  not  fulfilling  its 
function.     I  shall  be  glad  to  show  you  our  plotted 
results  on  these  two  items,  and  I  think  you  will  find 


34  INVESTIGATING   AN   INDUSTRY 

that  at  least  we  are  making  progress  in  the  right 
direction,  and  I  would  like  you  to  compare  our 
results  with  that  of  any  of  the  manufacturing  concerns 
that  you  are  interested  in."  "Well,  you  area 
1  crack-a-jack '  scientific  "manager,"  said  the  doctor. 
•  "I  am  going  to  put  you  in  touch  with  the  managers 
of  the  other  concerns  in  which  I  am  a  stockholder, 
and  if  you  don't  learn  something  from  them,  they,  I 
am  sure,  will  learn  something  from  you.  ^ 

'-The  next  subject  on  my  list  is  Power  Plant, 
with  the  items:  boilers,  engines,  condensers;  electric 
^generators,  heating  system,  lighting  system;  cost  of 
fuel,  efficiency  of  the  plant  and  of  its  several  items; 
water  evaporated  per  pound  of  fuel,  pounds  of  steam 
per  horsepower  per  hour  at  minimum,  peak  and; 
average  loads^  load  diagrams,  summer  and  winter; 
water  and  steam  records;  distribution  of  power  *by  K 
belts,  shafts,  electric  current;  motor  efficiency  at 
actual  loads,  lubrication,  roller  bearings,  total~<ost 
of  power  per  year;  items  of  possible  savings  Will 
you^ask  your  chie«f  engineer  to  give  me  a  report  on 
these  items,  and.  also  any  criticism  he  may  have  to 
make-' and  any  improvements  he  may  suggest  *wnich 
may  reduce* the  .cost  of  power  or  keep  the  machinery 
running  constantfy  at  proper  speeds?" 

The  manager  said,  "I  will  do  so.     No  doubt  you 
will  find  many  things  that  are  wrong  in  our  power  [ 
plant.    It  was  the  one  thing  in  which  the  original 


THE  DIAGNOSIS;  THE  FACTORY  35 

owner  of  the  plant  tried  to  save  money.  We  have  a 
non-condensing  engine,  an  old-style  boiler  with  too 
small  a  combustion  chamber,  and  are  making  lots 
of  smoke.  I  suppose  if  we  had  a  condensing  engine, 
mechanical  stokers,  a  CO?  apparatus,  a  steam  meter, 
and  a  poal  weighing  apparatus  we  might  save  30  or 

^40  per  cent  of  fuel,  but  w^  have  postponed  considera- 
tion^ these  matters  until  we  get  other  things  straight- 
ened but  fir^t,  which  seem -to  be  of  more  importance. 
If  business  is  dull  next  year  we  may  not  fejel  like  spend- 
ing aify  money  on  im^ovemei>ts."  "  Quite  right," 

*  said  the*  doctor.  "".If  your  fuel  bill  is  only  a  small 
fraction  of •  your  total,  expenditure,  and  there  is  4a 
possibility  that  you  may, not  need  a  power  plant  at 

,  all  if  y6tt*'can  buy  power  and  light  cheaply  enough 
f rom  ^k~*cen-tral  station,  which  will  also  heat  your 

/  buildiifgs  wi£n  its  exhaust  steam,  it  is  well  to  post- 
pone the.  power  plant  question. 

-  "Th</next'  thing  on  my  list,"  said  thetdo.ctor,  "is 
Designing  and  Drafting,  with  vthes"e  items:  Chief 
draftsman,  assistants;  -designing  and  drafting  meth-< 
ods;  photographing;  recording  and  filing;  statistics 
of  special  orders;  conferences  on  new  designs  and 
improvement  -of  old.  ones;  cost  of. -department; 
results  produced  by  it.  What  can  you  tell  me  about 
this  department?"  "Well,"  said  the  manager,  "it 
£  about  like  the  factory,  very  good  in  its  equipment, 
plenty  of  system  and  red  tape,  records  and  methods 


36  INVESTIGATING   AN   INDUSTRY 

all  right,  "bujt  the  results  we  get  from  it  are  not  pro- 
portionate 'to  its  cost.  The  chief  draftsman  and 
designer  is  a-  very  able  man,  and  he  could  handle  a 
large  corps  of  assistants  well,  but  we  have  not  enough 
new  work  on  hand  to  keep  many  men  busy  in  that 
department,  so  he  spends  a  great  deal  of  his  time 
doing  what  a  much  cheaper  man  could  do.  We 
cannot  well  dispense  with  him,  for  he  is  thoroughly 
acquainted  with  our  business,  and  we  occasionally 
need  his  high  grade  of  skill  on  special  orders.  I  wish 
you  would  suggest  some  way  of  improving  that 
department  so  that  it  could  be  made  to  pay  for  its 
keep."  "I  will  make  a  memorandum  of  that,"  said 
the  doctor,  uand  look  into  it  later." 


CHAPTER  IV 
The  Accounting  and  Sales  Departments 

''"THESE  are  all  the  questions  I  have  to  ask  at 
^resent  concerning  the  production  departments," 
&id  the  doctor.  "I  have  only  one  other  memor- 
andum on  my  list  for  today;  it  relates  to  the  account- 
ing^department.  Here  it  is."  The  doctor  handed 
ihe  manager  the  paper,  which  read  as  follows*  * 
^Accounting  system:  Does  it  give  the  manager 
the  information  he  should  have  in  regard  to  the 
distribution  of  the  active  working  capital  among 
'the  several  items:  cash;  bills  and  accounts  receivable;' 
finished  goods  in  warehouse  and  on  consignment; 
raw  material  on  hand;  work  in  progress;  also  a& 
to  advance  insurance  premiums;  advance  advertis- 
ing for  next  year's  business;  proportion  of  this  year's 
expense  chargeable  against  next  year  and  succeeding 
years;  change  in  value  of  fixed  capital  due  to  deprecia- 
tion and  obsolescence?  Are  the  books  examined 
and  reported  on  yearly  by  a  professional  accountant? 
Is  there  a  chart  with  entries  made  each  month 
showing  the  expenditures  for  material,  labor,  general 
factory  expense,  advertising  and  other  expense  of 
the  sales  department,  sales,  cash  receipts  from  sales, 
cash  on  hand,  bills  and  accounts  receivable,  bills  and 

37 


38  INVESTIGATING   AN   INDUSTRY 

/accounts  payable,  surplus  available  capital  to  meet 
^  possible  slackening  of  business  or  slow  collections? 
Is^  there  "a  similar  chart  showing  what  is  expected  in 
each^of  the  above  items  for  the  next^ix  to  twelve 
months,  for  the  purpose  of  aiding  in  reaching  a  de- 
"  cisioji  as  to  whether  expansion,  with  increasing  ex- 
penditure,  " standing  pat,"  or  "shortening  sail"  is 
the  proper  course  to  pursue? 

In  reply  the  manager  showed  the  doctor  the  books 
and  monthly  statistical  records  and  charts  covering 
all  the  items  asked  for  and  some  additional  ones, 
also  the  "last  report  on  the  accounts  by  a  firm  of 
chartered  accountants,  and  two  charts,  one  showing 
the  history  of  the  business,  month  by  month  fqr  two 
-years,  and  one  showing  the  future  prospects  as  well 
as  they  could  be  prognosticated.  .  In  relation  to  the 
last  the  manager  said;  "At.the^last  meeting  of 'the 
directors  we  studied  this  chart  and  came  to  the  con- 
clusion to  'stand  pat,'  or  ' let  well  enough  alone.' 
We  saw  no  reason  for  either  shortening'  sail  or  ex- 
panding, and  we  have  not  enough 'capital  to  go  into 
any  extensive  experimenting.  As  we  had  to  borrow 
some  money  last  year  to  meet  the  natural  expansion 
of  the  business,  we  concluded  to  let  the  whole  of  last 
year's  net  earnings  remain  as  working  capital,  and 
not  to  declare  a  dividend."  "  A  very  wise  conclusion,"^ 
said  the  doctor. 

"At  that  meeting,  however,"  continued  the  man- 


THE    ACCOUNTING   AND    SALES   DEPARTMENTS      39 

ager,  "an  unexpected  situation  arose — that  of  the 
impending  competition  and  consequent  curtailment 
of  our  market — and  for  that  reason  you  were  called 
in  as  adviser.  There  is  another  matter  that  I  wish 
you  would  consider  also,  that  is,  what  we  shall  do,  in 
view  of  the  threatened  reduction  of  the  tariff  on  our 
product?  Just  now  we;  have  the  whole  domestic 
market,  but  if  we  have  to  divide  it  with  the  Germans 
as  well  as  with  our  American  rivals,  I  don't  know 
what  is  going  to  become  of  us."  "I  am  studying 
these  questions,"  said  the  doctor,  "-and  I  will  have 
something  to  >say  -about  them  at  the  directors'  meet- 
ing. Now,  before  I  go,  I  am  v  going  to  leave  with  you 
two  papers  containing  -a  lot  of  'questions  /which  I 
wish  yeu  would  answer  as  well  as  you^cata  to-morrow 
afternoon,  wlien  I-hope  to  have  another  talk  with 
you.'/  The  first  paper  contained  the  following: 

Duties  of  the  president  and  of  the  directors.  How 
do  they  fulfill  their  duties?  » 

Relation  of"  the  directors  to  the  manager.  Are 
they  satisfactory?  v 

Organization  of  the  sales  'department.  What  are 
the  methods  of  distributing  the  product,  and  what  is 
the  efficiency  of  each  method?  Wholesaling,  jobbing, 
retailing;  branch  offices,  local  agents,  exclusive 
territorial  agents;  trade  agreements  and  contracts; 
re-sale  prices,  discounts,  rebates.  Advertising,  cor- 
respondence, bulletins,  circulars;  department  stores, 
mail  orders. 


40  .INVESTIGATING   AN   INDUSTRY 

Statistics  of  sales  and  of  costs  of  selling,  by  different 
methods,  by-  months,  by  districts, \nd  by  classes  of 
product. 

Ho.w  is  the  selling  price,  wholesale  and  retail,  de- 
^termined? 

Who  or  what '  determines  the  method  of  selling, 
the  selection  and  appointment  of  salesmen,  the 
salaries  and  commissions? 

What  .system  .have  you  for  training  salesmen? 
Do  your  salesmen  stay  with  you,  or  do  you  frequently 
have  to  get  new  ones? 

What  methods  are  in  progress,  or  in  prospect,  for 
increasing  the  efficiency  of  the  selling  department, 
both  as  to-  increasing  the  volume  of  goods  sold  •  and 
as  to  decreasing  the  cost  of  selling? 

What  are  the  limitations  to  the  quantity  of  goods 
that  can.  be  sold?     Can  the  market  be  developed  so, 
that  it  will  be  large  enough  to  afford  both  yourselves 
and  your  competitors  a  chance  of  doing  a  large^  and 
growing  business?  "y.".  , 

What  proposal  have  you  to  make  regarding  ways  of 
meeting  the  expected  competition  next  year,  and'^hat 
for  rilling  the  factory^with  pther  binds>of  wo^  in 
case  the  competition  cuts  down  the  volume  of  sales 
of  your  present  products? 

The  second  paper  was  a  printed  one,1  which  the 
doctor  had  used  in  another  factory,,  and  it  contained , 
the  following: 


^'Academic  Efficiency,"  by  William  Kent,  in  Proc.  Soc.  for 
Promotion  of  Engineering  Education,  1912,  vol.  22,  part  I;  also 
in  Science,  Dec.  20,  1912. 


THE   ACCOUNTING   AND    SALES   DEPARTMENTS      41 

i»  .  _ 

When  an  "efficiency  ^  expert  begin*  his  operations 
in  a  factpry  his  first 'Questions'  are:^  What  kind  of 
product  is  made?  -Why  is  it  rAade?  Why 'notj abandon 
it  ^It  is'not  profitable?  J^ne  next  set  of  questions 
covers  the  quality.  Is  the  quality  tpo  highly  refined 
and  too  costly,  so  that  its  market  i,s  limited?  Is  it 
too  common  and  cheap,  so  that  it  has  to  be  brought 
into  competition  with  the  poorest  goods  on  the 
market?  Is  it  out  of  date  and  unfashionable?  Is  the 
quality  what  it  ought  to  be,  and  if  not  what  are  the 
reasons,  and^how  can  it  be  improved?  , 

Next  come » questions  as  to  quantity.  Is  the 
factory  turning  out  too  much  of  one -kind  of  goods, 
so  that  the^market^s  glutted  and  the;price  too  low? 
Is  it  turning  out  too  little,  so  that  it  is  not  doirig  as 
much  business  as  it  might' do?,  Js«  k/turning  out 
too  much  of  one  kind  and  not  enough  of  another; 
and  if  so,  what  '.changes  shoulcf  be  made  so  as  to 

^establish  a  proper. balance?     \ 

*  After  these  questions  of  kyad,  quality,  and  quantity 
"^bf  product  are  considered,  then  comes  the 'question 
of  cost  per  unft  of  pVocfuct  and  of  possible  methods  of 
reducing  "that  cost.  In  the  factory  the  solution  of 
the^e  questions  is  one  of  great  difficulty  and  complex- 
ity^'It  includes  the  items  of  location,  "buildings, 
macjjfrifery,  system  of  organization,  functional  fore- 

*  manship,  statistics,  accounting,  planning  of  work, 
/routing  it  through  the  shop,  methods  of  payment  of 
wages, v  keeping  high-priced  men  only  on  high-priced 
wo*k  and  finally  time  study  resolved  into  its  elements, 
that .  is,  motion  study.  I  quote  from  Frank  B. 
pttbreth's  new  book  on  ^lotion  Study.  [The  words 
in  brackets  are  not  in  the  original] : 


42  INVESTIGATING   AN   INDUSTRY 

"There  is  no  waste  of  any  kind  is, the  world  that 
equals  the  waste  from  needless,  ill-directed,  and  in- 
effective motions  [true  of  the  sales  department].  .  .  . 
Tremendous  savings  are  possible  in  „  the  work  of 
everybody — they  are  nef  for  one  class,  they  are  not 
for  the  trades  only;  they  are  for  the  officers,  the 
schools,  the  colleges,  the  stores,  ,the  household,  and 
the  farms.  .  .  .  It  is  obvious  that  these  improvements 
must  and  will  come  in  time.  But  there  is  inestimable 
loss  in  every  hour  of  delay.  The  waste  of  energy 
of  the  workers  in  the  industries  [and  in  the  sales  de- 
partment] today,  is  pitiful.  ...  In  the  meantime, 
while  we  are  waiting  <for  the  politicians  and  educators 
to"  realize  the  importance  of  this  subject  and  to  create 
the  bureaus  and  societies  to  undertake  and  complete 
the  work,  we  need^  not  be  i^dle.  There  is  work  in 
abundance'  to  be  done.  Motion  study  must  be 
applied  to  all  the  industries  [including  the  sales 
department] :  * 

"i.  Observe  the  best  work  of  the  best  workers. 

"2.  Photograph  [and  'dictagraph'}  the  methods 
used. 

"3.  Record  the  methods  used. 

"4.  Record  outputs, 

"5.  Record  costs., 

<C6.  Deduce  laws. 

"7.  Establish  laboratories  [and  tests]  'for  frying 
out  laws.' 

"8.  Embody  laws  in  instructions. 

"9.  Publish  bulletins  [for  salesmen]. 

"  10.  Co-operate  to  spread  results  and  to  train  the 
rising  generation." 

Mr.    Gilbreth   refers   to  motion  study  of   the  in- 


THE   ACCOUNTING   AND    SALES   DEPARTMENTS      43 

dus tries  that  are  producing  material  wealth,  but  his 
words  may  be  applied  to  the  industry  of  [distributing 
and  selling  goods]., 

Mr.  Harringt6n  Emerson  has  written  a  book  en- 
titled "  The  Twelve  Principles  <Jf  Efficiency."  He 
'wrote  it  with  especial  reference  to  the  efficiency  of 
manufacturing  establishments,  but  the,  principles 
may  be  applied  to  [the  sales  departments].  .They 
are  the  following:  (i)  Clearly  denned  ideals.  (2) 
Common  sense.  {3)  Competent  counsel.  .  (4)  Dis- 
,  cipline.  (5)  The  fair  deal.  (6)  Reliable,  immediate 
*and  exact  records.  (7)  Despatching.  (8)  Standards 
and  schedules..*  (o)  Standardized  conditions.  (10) 
Standardized  operations.  (n)  Written  standard 
practice  instructions.  (12)  Efficiency  reward. 

_The  next  day,  an  hour; before  tjle  time  appointed, 
the  doctor  appeared  at  the  factory  with  a  companion, 
whom  he  introduced  as  a  mechanical  expert  whom, 
he  said,  he  wished  to  take  through  the  factory.  The 
manager  excused  himself  from  accompanying  them,  on 
account  o^  the  press  of  other  matters,'  and  said  they 
could  go  ahead  \tyithout  him.  The  doctor  took  the 
expert  first  into  the  assembling  room  and  then  into 
t  the  finished  stock  room,  explaining  to  him  the  differ- 
ent products,  and  finally  into  the  drafting  room,  where 
he  introduced  him  to  the  chief  draftsman.  "Are 
you,"  said  the  expert,  addressing  the  draftsman, 
" responsible  for  the  design  of  these  machines?" 
"No,"  he  replied,  "the  main  designs  were  made  before 


44  INVESTIGATING   AN   INDUSTRY 

I  came  here,  but  I  have  designed  some  slight  modi- 
fications, and  some  special  tools  for  the  cheapening 
of  their  manufacture,  under  the  directions  of  the 
general  manager."  "It  appears  to  me,"  said  the  ex- 
pert, "that  the  machines  are  Admirably  adapted  for 
their  purpose,  that  they  are  strong,  durable,  wkh 
bearings  well  proportioned,  and  with  an  Excellent 
system  of  lubrication,  but^that  they  are  not  designed 
with  reference  to  the  cheapest  system  of  manufacture. 
Here  are  three  castings,  carefully  fitted,  doweled 
and  bolted  together,  that  might  better  be  made  as  a 
single  cored  casting.  Here  are  small  castings  that 
need  a  great  deal  of  work  on  them  to  get  them  true 
to  size,  that  might  be  replaced  to  advantage  with 
drop  forgings.  I  noticed  in  the  factory  also  that 
many  parts  are  being  made  on  turret  lathes,  involving 
great  expense  for  such  a  variety  of  turning  tools, 
and  necessitating  frequent  changes  of  setting,  because 
these  parts  are  made  in  small  quantities  at  a  time. 
Many  of  these  parts  could  be  purchased  at  low  prices 
in  the  market  from  manufacturers  who  have  automatic 
machines,  as  they  are  standard  shapes  that  are  used 
for  other  purposes  by  the  thousand.  What  do  you 
think  about  these  matters?" 

"You  are  entirely  right  about  all  of  them,"  replied 
the  chief  draftsman,  "ancj.  I  have  brought  them  to 
the  attention  of  the  general  manager,  but  he  said,  in 
regard  to  the  larger  castings,  that  he  did  not  want  to 


THE   ACCOUNTING   AND    SALES   DEPARTMENTS      45 

go  to  the  expense  of  scrapping  the  old  patterns  and 
making  new  ones  with  expensive  core-boxes,  and  as 
to  replacing  the  smaller  castings  with  drop  forgings, 
that  would  involve  considerable  expense  for  making 
dies.  It  would  look  bad  on  the  cost  accounts,  he 
said,  to  charge  off  total  depreciation  of  these  patterns 
after  they  had  been  in  use  such  a  short  time,  and  to 
increase  the  tool  account  by  the  cost  of  these  dies. 
As  to  the  turret-lathe  work,  he  said  no  doubt  he  could 
buy  parts  made  on  automatic  machines  more  cheaply 
than  the  total  cost  of  making  them  in  the  factory 
if  they  were  charged  with  their  regular  proportion  of 
burden  or  general  factory  expense,  jDut  if  they  were 
not  made  in  the  factory,  the  turret  lathes  would  be 
idle,  while  the  expense  of  keeping  them  idle  would  be 
almost  as  much  as  that  of  keeping  them  at  work." 

On  returning  to  the  office  the  doctor  and  the  expert 
had  a  conversation  with  the  general  manager  in  regard 
to  J:he  matters  talked  of  in  the  drafting  room,  and  he 
confirmed  what  the  chief  draftsman  had  said.  It 
appeared  further  that  the  general  manager  had  not 
made  any  detailed  study  or  estimate  of  the  cost  of 
making  new  patterns  and  dies,  or  of  the  saving  that 
might  be  made  by  purchasing  parts  made  on  auto- 
matic machines.  -  His  decision  in  regard  to  them  was 
based  on/his  "judgment,"  and  was  not  the  result  of 
investigation. 

The  expert  then  left,  after  being  informed  that  his 


46  INVESTIGATING   AN   INDUSTRY 

services  for  a  detailed  investigation  might  be  called 
for  at  an  early  date.  The  manager  then  said  he  was 
ready  to  reply  as  best  he  could  to  the  questions, 
written  and  printed,  that  had"  been- given  to  him  the 
previous  day,  but  was -sorry  that  he  could  not  give 
definite  and  satisfying  answers  to  all  of  them.  In 
regard  to  the  duties  of  the  president  and  directors, 
he  said  that  nominally  their  duties  were  to  have 
general  charge  of  the  whole  business  and  to  direct 
him  what  to  do.  Practically  they  fulfilled  their  duty 
by  telling  him  to  go  ahead  and  run  it  and  report  at 
each  of  the  monthly  meetings  what  was  done  or  being 
done.  His  relations  with  them^  were  perfectly 
satisfactory.  They  trusted  him  in  everything  and 
only  asked  him  for  results.  Not  one  of  them  had 
any  expert  knowledge1  of  the  business,  an^l  each  of 
them  had  business  'enough  of  Jvis  own,  grocer,  real 
estate  man,  insurance,  and  tiie  like,  so  that  he  could 
give  but  little  time  to  the  factory  business.  He  would 
like  it  better,  he  said,  if  one  of  them  had  been  a  manu- 
facturer, or  even  a  man  in  the  wholesale  or  jobbing 
business,  so  that  he  could  get  some  points  on  the  art 
of  selling,  in  which  he  confessed  himself  a  novice. 

As  to  the  organization  of  the  selling  department, 
he  said  it  was  quite  simple,  he  hired  the  traveling 
salesmen;  there  were  three  of  them  covering  the 
whole  country,  and  he  had  an  excellent  chief  sales 
clerk  and  correspondent,  who  was  practically  a  sales 


THE   ACCOUNTING   AND    SALES   DEPARTMENTS     47 

manager  in  all  but  the  name  and  in  the  power  of 
deciding  on  the  policy  of  the  sales  department,  which 
he  reserved  to  himself.  His  clerk  kept  complete 
statistics  and  charts  of  -sales  and  prospects. 

As  to  wholesaling,  jobbing  and  retailing  he  made 
a  statement  as  follows:  "Here  is  a  machine,  on  which 
we  have  fixed  the  selling  price  to  the  final  purchaser 
at  $100,  no  discount,  this  being  as  high  as  we  think 
the  market  will  bear.  Our  factory  cost  estimate  for 
this  machine,  based  on  2000  made  per  year,  is  as 
follows:  material,  $15;  labor,  $10;  factory  expense, 
$15;  total,  $40;  based  on  1000  made  per  year: 
material,  $15;  labor,  $11;  factory  expense,  $19; 
total,  $45.  On  making  a  canvass  of  the  wholesale, 
jobbing  and  retail  trades  concerning  their  handling 
these  machines  by  buying  a  stock  of  them  and  selling 
them,  here  is  what- we  found:  The  average  retailer 
thought  he  could  not  dispose  of  more  than  three  a 
year,  and  to  pay  him  for  carrying  them  in  stock  he- 
could  not  pay  more  than  $75  for  them,  so  that  his 
margin  would  be  33  K  per  cent,  or  $25.  The  jobber, 
who  would  canvass  the  retail  trade,  wanted  25  per 
cent,  which  'would  make  the  cost  to  him  $60.  The 
wholesaler  selling  to  jobbers  .  at  $60  would  want  20 
per  cent  profit,  making  the  cost  tp  him  only^$5o. 
On  being  asked  what  they  could  do  in  the  way  of. 
advertising  and  pushing  the  goods,  both  wholesaler 
and  jobber  said  they  would  print  cuts  of  the  machine 


48  INVESTIGATING    AN   INDUSTRY 

in  their  catalogs,  and  issue  leaflets  to  their  trade,  and 
their  salesmen  would  have  it  on  their  lists;  but,  said 
they,  'You  must  create  the  demand,  and  pay  for  the 
newspaper  advertising.  We  handle  staple  and  well- 
known  goods,  and  we  sell  what  people  demand,  but 
the  manufacturer  is  the  one  who  must  give  publicity 
to  his  own  goods.'  As  the  machine  would  cost  us 
not  less  than  $45  delivered  at  the  factory,  if*  we 
made  1000  of  them  a  year,  or  440  if  we  made  2000, 
and  it  might  cost  us  anywhere  from'$io  to  $20 
for  expense  of  advertising,  salesmen,  and  collec- 
tions, there  was  no  money  in  it  for  us  if  we  dis- 
tributed the  goods  through  the  regular  channels. 
Here, is  a  point  oh  the  'high  cost  of  living':  material, 
$15;  labor,  $10;  factory  expense,  $15;  total,  $40; 
paid  by  the  'ultimate  consumer/  $100;  cost  paid  by 
the  consumer  for  getting  the  machine  from  the 
factory  into  his  hands,  $60;  profit  to  the  factory, 
nothing.  On  this  account  we  concluded  to  offer  the 
machine  to  the  wholesaler,  jobber  and  retailer  On 
our  terms  and  not  on  theirs,  and  to -treat  all  of 
them  alike.  If  any  of  them  sent  us  an  order  for  one 
machine  we  would  bill  it  at  15  per  cent  discount,  20 
per  cent  'for  two  machines,  25  for  three  or  more. 
We  have  advertised  extensively  in  the  technical  press, 
and  by  circulars  sent  to  a  selected  list  of  possible 
customers,  and  our  three  traveling  salesmen  have 
canvassed  the  country  quite  thoroughly.  We  have 


THE   ACCOUNTING   AND    SALES   DEPARTMENTS      49 

no  branch  offices,  and  no  local  or  territorial  agents, 
but  are  ready  to  establish  agents  when  any  one  comes 
along  with  sufficient  inducements  in  the  way  of 
capital.  We  sell  the  goods  to  any  one  who  calls  for 
them,  and  we  have  nothing  to  do  with  re-sale  prices, 
trade  agreements,  special  discounts  or  rebates. 
We  think  the  results  of  this  method  of  handling  the 
business  have  been  fairly  satisfactory,  and*  last  year 
we  made  a  fair  profit  on  these  machines.  As  to  the 
other  sizes  of  machine  the  story  is  practically  the  same. 

"As  to  methods  of  training  salesmen,  we  have 
none;  we  were. lucky  enough  to  get  good  ones, s we 
pay  them  well,  part  salary  and  part  commission,  and 
we  haye  been  able*to  hold  them.  I  cannot  say  that 
we  have,  considered  any  method  of  improving  their 
efficiency. 

"As  to  limitations,  of  the  quantity  of  goods  that 
can^be  sold,  there  certainly  are  narrow  limitations. 
Our  "machines  are  special  ones,  used  only  in  certain 
factories.  "They  are  not  like  automobiles,  sewing 
machines  and  typewriters,  that  appeal  to  the  general 
public.  We  cannot  count -on  there  being  more  than 
5000  possible  consumers  for  our  products  in  the 
whole  country,  and  we  think  we  are  reaching  them 
all  by  our  salesmen,  advertising,  circulars  and  cor- 
respondence. Unfortunately  for  us,  our  machines 
do  not  wear  out,  and  this  fact  restricts  the  demand  for 
them.  I  do  not  see  any  possibility  of  there  being  a 


50  INVESTIGATING  ~AN   INDUSTRY 

big  enough  market  for  both  ourselves  and  our  ex- 
pected competitors.  I  have  no  proposal  to  make  as 
yet,  as  to  ways  of  meeting  competition;  in  fact,  I 
did  not  expect  it,  and  have  not  given  thought  to  the 
subject.  I  am  looking  to  you  and  the  directors  for 
proposals. 

"As  to  the  questions  on  your  printed  paper,  'What 
product  is  made?'  That  you  have  already  seen. 
'Why  is  it  made?'  Well,  because  we  got  started  that 
way  and  have  just  kept  on.  Why  did  we  start  that 
way?  Probably  because  of  some  one's  judgment 
that  the  business  would  be  a  good  one.  Perhaps  too 
much  optimism,  faith,  confidence,  enthusiasm,  all 
good  qualities,  and  those  upon  which  civilization  and 
prosperity  advance.  These  are  the  qualities  we  must 
continue  to  have  if  we  are  going  to  get  out  of  the 
difficulty  that  confronts  us,  but  I  see  that  they  are 
not  enough.  We  must  add  to  them  knowledge  and 
foresight  of  business  conditions.  I  see  the  drift  of 
your  printed  paper.  It  is  not  enough  to  have  scientific 
management  inside  of  the  factory,  we  must  have  it 
outside,  in  the  selling  department;  we  must  have 
research  and  investigation  not  only  as  to  how  to  sell 
the  goods  that  we  make,  but  as  to  whether  we  ought 
not  to  make  and  sell  something  else,  and  as  to  what 
that  something  should  be.  Now  I  am  going  to  confess 
to  you  my  limitations.  I  know  a  lot  about  factories, 
and  about  scientific  management  of  them.  I  have 


THE    ACCOUNTING   AND    SALES   DEPARTMENTS      51 

had  good  luck,  I  call  it  nothing  else,  in  getting  sales- 
men. I  think  I  have  made  no  mistake  in  our  selling 
policy,  but  when  it  comes  to  originating  plans  for  a 
new  business,  requiring  foreknowledge  of  business 
conditions,  I  am  all  at  sea.  That  is  out  of  my  line. 
I  think  it  is  your  line,  and  I  am  looking  to  you  to 
get  me  out  of  this~hole." 

"I  am  very  glad  you  told  me  all  this,"  said  the 
doctor.  Confession  of  ignorance  is  the  beginning  of 
wisdom.  It  is  a  wise  man  who  is  aware  of  his  ignor- 
ance. Such  a  man  is  the  born  investigator,  the  man 
who  with  proper  training  is  fitted  to  become  a  scien- 
tific manager,  or  at  least  a  scientific  manager  of  one 
department  of  a  business.  No  one  man  is  such  an 
all-around  genius  that  he  can  be  a  scientific  manager 
of  everything.  The  conclusion  of  this  preachment 
I  will  postpone  until  I  have  had  a  talk  with  the 
directors." 


CHAPTER  V 
The  Doctor's  Preliminary  Report 

.THE  meeting  of  the  directors  was  held  on  the 
appointed  day,  and  the  doctor  gave  them  a  long  talk 
about  what  he  had  found  out  in  his  visits  to  the 
factory  and  in  his  conversations  with  the  manager, 
the  chief  draftsman  and  the  mechanical  expert. 
"To  save  your  time,"  he  said,  "L-will  read  from  my 
memorandum  book  a  few  brief  notes  on  some  of 
the  principal  branches  of  my  investigation  which 
appear  to  "freed  no  further  consideration  at  the  present 
time,  and  then  I  will  take  up  the  symptoms  that  are 
in  need  of  treatment. 

Location,  ideal. 

Buildings,  ditto,  but  larger  than  needed  for  present 
extent  of  business. 

Equipment,  excellent,  suitable  for  a  great  range  of 
light  metal  products. 

Machine  load  factor  in  month  of  maximum  out- 
put, 53  per  cent  based  on  number  of  machines,  42 
per  cent  based  on  machine-hour  rate.  Average  for 
last  12  months,  44  and  32  per  cent. 

Power  plant,  good,  but  old  style,  underloaded,  and 
/  uneconomical. 

x  Designing  and  drafting,  high-priced  man  on  low- 
priced  work;   not  enough  new  work  for  him. 

52 


THE  DOCTOR'S  PRELIMINARY  REPORT          53 

Management,  inside  the  factory,  thoroughly  mod- 
ern, Taylor  system;  outside,  traditional,  old-fash- 
ioned. , 

Product,  quality  excellent;  demand  restricted; 
variety  too  large,  smaller  sizes  of  some  styles  might 
be  abandoned;  design  of  some  parts  might  be  imr 
proved  so  as  to  lessen  manufacturing  cost  a  little. 

Accounting  system,  excellent;  good  charts  of  results. 

Sales  departments,  suitable  for  present  "extent  of 
business,  but  not  the  best  for  enlarging  the  business. 

"  We  will  pass  for  the  present  all  these  items  and 
come  to  others  which  are  of  pressing  importance: 

Organization.  Suitable  for  the  present  business 
in  gobd  times;  not  adapted  to  cope  with  new  prob- 
lems. Manager  a  good  autocrat,  a  benevolent  despot, 
a  thorough  factory  man;  his  mind  runs  'on  a  single 
track,'  inside  of  the  factory.  *. 

Prospects,    ruinous   competition  ahead,   with   no} 
plans  for  meeting  it. 

Finances,  ample  for  a  steady  prosperous  business; 
some  reserves  to  meet  ordinary  business  depre'ssion, 
but  none  to  spare  for  revolutionary  changes  of 
hazardous  experiments. 

"Now,"  said  the  doctor,  "I  have  diagnosed  the 
symptoms  of  the  patient's  disease.     It  is  a  case  out- 
side of  the  range  of  my  previous  experience  as  physi- 
cian of  lame  businesses,  and  is  not  considered  in  the  ^ 
books  of  Dr.  Taylor  or  of  any  other  writer  on  scientific  ' 
management.     I  have  heard  of  many  similar  cases, 
however,  and  I  judge  that  the  percentage  of  mortality 


54  INVESTIGATING   AN   INDUSTRY 

in  these  cases  was  about  50.  Of  those  that  survived 
the  majority  had  a  severe  struggle,  many  of  them  witl\ 
assessments  of  stockholders,  or  issuing  of  bonds, 
while  others  seemed  to  come  through  more  by  luck 
than  by  good  management.  I  knpw  of  no  specific 
or  panacea  for  the  trouble.  The  usual  method  of 
treatment  is  for  some  one  to  guess  at  a  remedy,  and 
then  it  is  tried.  It  may  work  and  it  may  not. 

"When  I  was  a  doctor  of  medicine  I  tised  to  keep 
in  my  note  book  a  list  of  old  proverbs  or  maxims, 
which  often  in  times  of  doubt  suggested  an  idea. 
Such  were,  'A  burnt  child  dreads  the  fire.'  'Fire  is 
a  good  servant  and  a  bad  master.'  'What  is  medicine 
for  one  man  is  poison  for  another;  ten  grains  of  blue 
mass  will  cure  a  mason  of  fever — but  will  kill  a  tailor.' 
When  I  became  a  diagnoser  of  sick  businesses  I  col- 
lected a  lot  of  maxims  which  seemed  appropriate.  I 
will  read  you  some  of  them.  You  will  notice  that 
some  of  them  seem  to  contradict  others." 

Competition  is  the  life  of  trade. 
Competition  leads  to  consolidation.   , 
A  penny  saved  is  a  penny  earned. 
Hold  a-  penny  too  close  to  your  eye  and  you  fail 
to  see  the  dollar  beyond  it. 

Save  at  the  spigot  and  waste  at  the  bung. 

It  never  pays  to  milk  mice. 

Young  men  for  action,  old  men  for  counsel. 

In  the  multitude  of  counselors  there  is  wisdom. 

Too  many  cooks  spoil  the  broth. 


55 

"The  last  two  maxims  are  not  really  in  opposition, 
although  at  first  sight  they  appear  to  be.  If  you 
want  a  good  apple  pie  made,  one  good  cook  can 
make  it  without  any  advice;  but  if  you  ask  him  to 
make  a  mutton  pie  he  may  say  that  he  has  never 
made  one  and  that  he  wishes  to  take  counsel  of 
other  cooks  before  attempting  it.  Notice  that  he 
wants  the  counsel  of  experts,  not  of  any  Tom,  Dick 
or  Harry  who\  may  volunteer  to  give  advice.  The 
-•  counselors  must  be  selected.  Notice  also  that  when 
he  gets  the  counsel  he  does  not  ask  any  other  cook  to 
help  him  make  the  pie,  he  makes  it  himself. 

"So  in  this  business  you  have  one  cook,  the  general 
manager,  but  he  has  had  no  counselors.  He  is  a 
good  cook,  within  his  limitations,  which  are  the  fouf 
walls  of  the  factory,  but  he  is  not  a  good  cook  beyond 
these  walls,  in  the  -selling  department,  especially 
wrhen  it  is  facing  a  dangerous  situation.  What  we 
need  immediately  is  several  expert  counselors,  and  L 
think  I  know^where  to  get  them.  Call  in  from  the 
road  your,  three  cjiief  salesmen  and  ask  them  for  their 
advice.  We  may  find  that  one  of  them  can  give  us 
the  correct  solution  of  the  problem,  but  if  not,  the 
'dfscussion  with  them  may  give  one  of  us  an  idea 
which  may  lead  to  the  correct  solution.  In  order 
that  they  may  come  to  us  with  matured  thoughts 
upon  the  subject,  I  have  drafted  a  letter  to  them 
which  will  set  them  thinking.  I  will  read  it  to  you." 


56  INVESTIGATING   AN   INDUSTRY 

Dear  Sir:  We  have  called  a  joint  meeting  of  our 
directors  and  of  our  whole  selling  organization,  to 
be  held  on  2oth  and  2ist  inst.,  beginning  at  10  A.  M. 
each  day,  for  the  purpose  of  considering  the  impending 
competition  in  our  business  and  deciding  what  steps 
should  be  taken  to  meet  it.  Please  be  present  without 
fail,  and  come  prepared  to  give  us  the  benefit  of  your 
advice,  and  we  would  prefer  that  you  mail  to  us 
your  views  in  writing  on  or  before  i5th  inst.,  so  that 
the  directors  may  discuss  them  in  advance  of  the 
meeting. 

The  facts  of  the  case  are  as  follows:  The  first 
year  after  building  the  factory  and  installing  the 
present  management,  our  total  sales  amounted  to 
$350,000;  costs:  factory,  $260,000;  sales  department, 
$105,000;  net  loss,  $15,000.  The  second  year  the 
sales  were  $700,000;  factory  cost,  $456,000;  selling 
cost,  $175,000;  net  gain,  $69,000.  The  business  the 
first  three  months  of  this  year  indicates  that  the 
results  of  the  whole  year's  business  will  be  about  the 
same  as  those  of  the  past  year  unless  sales  decrease. 
That  they  will  decrease  is  practically  certain.  An- 
other .concern  is  going  to  make  the  same  goods  and 
we  will  no  longer  have  a  monopoly.  It  can  make 
the  goods  at  about  the  same  factory  cost  as  ours, 
and  it  will  have  an  advantage  over  us  in  cost  of 
selling,  which  advantage  we  estimate  at  about  ten 
per  cent  of  the  gross  price,  due  to  the  fact  that  it 
will  handle  the  goods  as  a  side  line  through  its  several 
branch  offices  and  will  utilize  the  newspaper  space  it 
has  already  bought  for  its  other  lines.  A  few  extra 
leaves  in  its  quarterly  bulletin  will  soon  inform  all 
our  customers  that  it  is  competing  with  us. 


THE  DOCTOR'S  PRELIMINARY  REPORT          57 

Unless  the  demand  for  these  goods  can  be  increased, 
this  competition  will  probably  cut  our  business  down 
one-half,  and  the  result  will  be  to  reduce  our  profits 
to  nothing,  even  if  present  prices  are  maintained. 
If  the  prices  are  cut  ten  per  cent,  and  selling  expenses 
are  as  high  as  they  now  are,  our  business  will  show  a 
loss. 

The  following  suggestions  have  been  made  by  some 
of  the  directors  merely  for  the  purpose  of  discussion, 
and  we  give  them  to  you  that  you  may  think  them 
over  and  give  us  your  views  on  them: 
i     i.  Discourage  the  rival  by  cutting  below  his  prices. 

2.<  Consolidate  with  him. 

3.  Offer  to  buy  his  patterns  and  have  him  agree 
to  keep  out  from  our  lines. 

4.  Extend  the  market  -by  more  advertising  and  by 
the  employment  of  more  agents  and  salesmen. 

f  Try  to  get  a  foreign  market. 

6.  Cheapen  the  cost  of  manufacture;    especially 
reduce  the  overhead  charges  of  the  factory. 

7.  Keep  on  as  we  are,  expecting  that  our  reputation 
will  bring  us  the  bulk  of  the  trade. 

8.  Find  some  other  thing  to  manufacture. 

9.  Reduce  the  fixed  charges  of  the  sales  depart- 
ment;  this  involves  our  dispensing  with  at  least  one 
of  our  high-priced  salesmen  and  appropriating  less 
money  to  advertising. 

Please  put  in  writing  your  views  as  to  each  of  the 
above  suggestions,  and  if  you  have  any  suggestions 
of  your  own  to  make  we  would  like  to  have  them  in 
advance  of  the  meeting  so  that  we  may  have  time  for 
their  consideration. 

If  you  favor  suggestion  No.  8,  that  is,  finding  some 


58  INVESTIGATING   AN   INDUSTRY 

other  thing  to  manufacture,  in  addition  to  our  present 
product,  please  state  what  thing  or  things  you  would 
advise  us  to  make,  and  give  any  figures  you  may 
'  have  concerning  the  extent  of  the  demand,  the  selling 
prices,  discounts,  costs  of  selling,  and  methods  you 
would  propose  for  handling  them. 

Please  acknowledge  receipt  by  wire,  stating  when 
you  will  start  for  home. 

The  letter  was  at  once  approved  and  ordered  to 
be  typewritten  and  sent  to  each  of  the  three  salesmen. 
The  doctor  then  said:  "I  have  a  lot  of  suggestions 
of  my  own  as  to  what  had  best  be  done  to  prepare  for 
the  expected  competition,  but  I  prefer  to  withhold 
them  until  I  have  met  your  salesmen  and  get  ac- 
quainted with  them.  In  the  meantime  I  have  a 
few  other  matters  to  discuss.  I  have  been  looking 
over  the  figures  of  last  year's  business,  and  here 
is  what  I  find: 

Factory  cost,  labor  and  material 83 . 4 

Factory  expense 16 . 6     100 . 


Selling  expense,  per  cent  of  factory  cost 38.4 

x^tling  expense,  per  cent  of  selling  price 25.0 

"  The  factory  expense,  16.6  per  cent,  is  apparently 
very  low,  but  it  is  partly  due  to  the  fact  that  the 
wages  of  the  functional  foremen  and  of  all  the  fac- 
tory clerks  are  included  in  the  labor  cost,  and  are 
not  charged  to  " unproductive  labor,"  as  is  the 
custom  with  some  accountants.  I  do  not  think  that 


THE  DOCTOR'S  PRELIMINARY  REPORT          59 

the  total  annual  cost  of  either  the  so-called  unpro- 
ductive labor  or  of  the  factory  expense  is  exces- 
sive for  so  large  a  factory  or  for  one  doing  such  a 
large  variety  of  work,  except  that  some  saving  might 
be  made  in  the  cost  of  fuel  if  a  more  economical 
engine  were  installed,  and  that  the  high-priced  chief 
draftsman  is  not  turning  out  work  of  value  pro- 
portioned to  his  pay. 

"The  chief  trouble  with  the  factory  is  that  it  has 
not  enough  work  to  do  to  utilize  to  the  fullest  extent 
either  its  space,  its  machinery,  or  the  time  of  the 
manager,  the  foremen  and  the  chief  clerk,  all  high- 
priced  men.  The  machinery  may  be  working  with 
very  high  efficiency  while  it  is  running,  but  its  average 
load  factor  is  only  44  per  cent,  and  the  average  load 
factor  of  the  capital  invested  in  it,  including  the 
space  it  occupies  and  its  share  of  the  general  expense, 
making  the  'machine-hour'  cost,  is  only  32  per 
cent,  on  account  of  the  fact  that  it  is  the  largest 
and  most  expensive  machines  that  have  generally 
the  lowest  load  factor,  while  some  of  the  smaller 
machines  are  running  from  70  to  95  per  cent  of  the 
time.  If  a  few  more  small  machines  were  installed 
in  the  vacant  space  that  is  waiting  for  them,  the 
product  of  the  factory  might  be  doubled  provided, 
of  course,  that  the  increased  product  could  be  market- 
ed. This  trouble  would  cure  itself  in  a  short  time 
if  business  conditions  remained  normal,  with  a  steadily 


60  INVESTIGATING   AN   INDUSTRY 

increasing  demand  for  the  product,  but  with  the  new 
conditions  of  severe  competition  it  is  likely  to  become 
more  serious. 

"The  cost  of  selling  is  not  high  in  comparison 
with  the  cost  in  some  other  lines  of  manufacture 
under  modern  methods  of  doing  business  with  ex- 
pensive branch  offices,  whole-page  and  double-page 
advertising,  extravagant  salaries  and  commissions 
to  agents,  and  the  like,  which  bring  the  cost  of  selling 
often  up  to  from  two  to  four  times  the  manufacturing 
cost,  but  it  is  high  enough  to  suggest  the  possibility 
that  it  can  be  considerably  reduced.  In  other  lines 
of  business  the  ratio  of  selling  cost  to  manufacturing 
cost  varies  through  an  exceedingly  wide  range.  For 
example,  I  visited  a  factory  in  New  England  recently 
and  got  the  price  of  a  special  machine  used  in  some 
textile  mills.  I  was  surprised  at  what  seemed  to  be 
a  remarkably  low  price,  and  asked  what  it  cost  to 
sell  them.  'Practically  nothing,'  was  the  reply. 
'Every  one  that  has  a  need  for  our  machines  knows 
exactly  what  they  are,  and  also  the  fixed  price,  and 
if  he  wants  any  of  them  he  sends  us  an  order;  so  we 
do  neither  soliciting  nor  advertising.'  That  is  the 
old  way  of  doing  business.  If  a  man  wanted  a  wagon, 
he  went  to  the  wagon  maker  and  bargained  for  it. 
Now  if  he  wants  an  automobile,  he  sees  the  flashy 
advertisements  of  a  dozen  of  them,  writes  for  the 
handsome  catalogs,  is  called  on  by  a  dozen  agents, 


THE  DOCTOR'S  PRELIMINARY  REPORT          61 

representing  as  many  expensive  offices  on  Broadway, 
is  treated  to  'demonstrations'  by  all  of  them,  and 
finally  buys  one,  paying  in  the  purchase  price  not 
only  the  factory  cost  plus  a  reasonable  profit  on  it, 
but  also  the  cost  oi  competition,  which  is  the  'life 
of  trade/  and  which  may  be  equal  to  or  more  than 
the  factory  cost.  This  condition  of  business  is  all 
right  so  long  as  the  extraordinary  demand  keeps  up, 
but  it  will  end  in  disaster  to  many  of  the  makers 
just  as  soon  as  the  capacity  of  the  factories  is  in- 
creased to  such  a  point  that  it  is  greater  than  the 
demand.  Then  will  come  the  struggle  for  the  sur- 
vival of  the  fittest,  and  the  final  survivors  will  be 
only  those  who  combine  a  high  reputation  with 
facilities  for  manufacturing  at  the  lowest  cost  and 
ample  capital  to  sustain  the  struggle  until  the  weak 
competitors  are  driven  to  the  wall  and  costs  of  selling 
are  reduced  to  a  reasonable  figure.  The  history  of 
the  sewing-machine  business  and  of  the  bicycle 
business  will  be  repeated.  There  was  a  time  when 
the  price  of  a  sewing  machine  was  $60,  which  was 
made  up  of  factory  cost  $10,  cost  of  selling  $30, 
profit  $20.  When  the  price  came  down  suddenly  to 
$30,  the  factory  cost  was  still  $10,  and  selling  cost 
and  profits  were  reduced  each  to  the  same  figure. 
The  price  of  a  good  bicycle  was  held  for  several 
years  at  $100,  of  which  $15  was  factory  cost,  $65 
cost  of  selling,  including  special  discounts  and  allow- 


62  INVESTIGATING   AN   INDUSTRY 

ances  made  for  old  machines;  profit  $20.  The  price 
suddenly  broke  to  $50,  then  to  $40  and  $30,  and 
three-quarters  of  the  makers  either  went  into  bank- 
ruptcy, or  else  raised  more  capital  and  went  into  the 
automobile  business. 

"Your  business  is  in  no  immediate  danger  on 
account  either  of  poor  factory  facilities,  high  cost  of 
selling,  or  lack  of  capital  to  carry  you  through  a 
business  depression,  but  if  you  are  driven  to  extending 
your  business  into  other  lines  in  order  to  get  work 
to  keep  the  factory  busy,  it  is  of  the  greatest  impor- 
tance that  you  select  the  right  thing  to  manufacture, 
that  you  have  facilities  for  making  it  at  least  as 
cheaply  as  ycair  strongest  probable  competitor',  that  it 
is  an  article  in  large  and  regular  demand,  not  subject 
to  changes  in  fashion,  and  that  your  making  it  will 
not  tie  up  your  capital  in  such  a  way  that  you  have 
no  resources  in  case  of  a  struggle  or  financial  depres- 
sion. Your  available  working  capital  is  not  large 
enough  to  warrant  your  embarking  in  any  speculative 
venture,  no  matter  what  may  be  its  promises  of 
large  profits,  and  in  the  present  financial  temper  of 
the  country  it  is  going  to  be  very  difficult  to  raise 
additional  capital  by  selling  new  stock  of  a  manu- 
facturing company. 

"  I  hope  to  get  from  our  three  salesmen  some  good 
suggestions^  as  to  what  other  line  of  'manufacture  to 
engage  in,  but  if  they  have  nothing  attractive'  to 


THE  DOCTOR'S  PRELIMINARY  REPORT          63 

offer,  then  we  must  start  a  systematic  investigation 
to  find  something. 

"Your  manager  has  asked  me  to  give  you  my  views, 
as  to  the  probable  effect  of  the  threatened  reduction 
of  the  tariff.  Frankly,  I  do  not  know  what  the 
effect  will  be,  and  I  think  that  no  one  else  knows; 
least  of  all  the  leaders  of  the  majority  in  Congress. 
The  new  tariff  bill,  if  it  passes  in  its  present  shape, 
is  a  leap  in  the  dark.1  It  is  opposed  to  the  first  law 
of  prudence,  'look  before  you  leap.'  It  appears  to 
be  based  purely  on  politics  and  on  guesswork,  and 
not  on  any  kind  of  scientific  investigation. 

"Here  is  what  Hon.  Wm.  C.  Redfield,  now 
Secretary  of  Commerce,  wrote  a  year  ago  in  his 
'New  Industrial  Day/  concerning  sudden  changes 
in  business: 

Any  radical  change  in  factory  management  must  be 
a  gradual  evolution  out  of  that  which  has  preceded 
it.  The  present  system,  or  lack  of  systems,  with 
their  good  or  bad  points,  are  themselves  the  result  of 
long  evolution.  No  drastic  or  radical  change  in  them 
can  be  suddenly  or  even  rapidly  made  without  causing 
disturbance. 

"This  same  Mr.  Redfield  is  now  urging  a  drastic 

1  This  statement  was  printed  iri  Industrial  Engineering  in 
June,  1913.  The  tariff  bill  h^s  since  been  passed.  The  leap 
in  the  dark  has  been  taken,  but  at  the  present  date,  Dec.  I, 
1913,  no  pne  knows  what  the  result  will  be. 


64  INVESTIGATING   AN   INDUSTRY 

and  radical  change,  the  reduction  of  the  tariff,  and  he 
insists  that  wages  shall  not  be  reduced,  under  penalty 
of  an  investigation  by  his  department.  He  wants 
efficiency  to  be  introduced  not  by  gradual  evolution 
but  immediately.  He  said  in  a  recent  speech  (see 
New  York  Times,  May  15,  1913): 

Operating  with  bad  equipment,  with  unscientific 
treatment  of  material,  with  antiquated  methods,  in 
poor  locations,  with  insufficient  capital  and  generally 
ineffective  management,  will  not  be  esteemed  a  satis- 
factory reason  for  reducing  wages.  .  .  .  The  stern 
demand  for  efficiency  as  a  duty  which  our  industries 
owe  to  the  public — these  are  all  parts  of  the  awakened 
American  manhood.  ...  I  believe  that  a  day  of 
freedom  has  just  begun  and  that  we  are  shaking  oft" 
the  shackles  of  a  real  industrial  slavery  to  enter  upon 
the  arena  of  free  competition,  strong,  athletic  and 
vigorous,  in  which  our  business  will  be  stronger  and 
safer  and  in  which  we  shall  be  happier  than  ever  before. 

"Here  is  eloquence  indeed,  the  American  eagle 
screams,  but  neither  eloquence  nor  investigations  by 
the  Department  of  Commerce  will  avail  to  prevent 
the  reduction  of  wages  if  that  is  necessary  to  insure 
that  the  workmen  in  our  factories  are  not  to  be 
thrown  out  of  employment  on  account  of  their  work 
being  given  to  workmen  in  foreign  countries.  If 
the  new  tariff  is  low  enough  to  enlarge  greatly  the 
importation  of  goods  that  are  now  manufactured 
here  it  means  idleness  for  many  of  our  workmen 


THE  DOCTOR'S  PRELIMINARY  REPORT          65 

until  other  work  can  be  found  for  them,  until  they 
emigrate  to  find  work  in  foreign  factories,  or  until 
they  accept  wages  sufficiently  low  here  to  enable 
the  goods  again  to  be  manufactured  in  this  country. 
/'Another  writer  (CJeorge  F.  Brett,  in  the  Outlook, 
May  17,  1913)  says: 

The  effect  of  the  reduction  of  the  tariff,  as,  at  any 
rate,  one  business  man  sees  it,  will  be  first  of  all  some 
reduction  in  the  cost  of  living  brought  about  by  the 
competition  of  the  foreign  producer — and  this  re- 
duction of  prices  will  not,  in  my  opinion,  reduce  the 
wages  of  factory  workers  at  all,  but  by  bringing  about 
economies  in  management,  by  reducing  lavish  and 
unnecessary  expenditures  for  exploitation,  prove  a 
blessing  to  the  manufacturers  themselves. 

"The  'high  cost  of  living'  has  been  the  chief 
excuse  during  the  past  ten  or  fifteen  years  for  the 
increase  of  wages,  which  have  been  steadily  advancing 
since  1898,  not  even  being  reduced  during  the  de- 
pression of  1907.  If  high  cost  of  living  sent  wages 
up,  why  should  not  a  reduced  cost  of  living  bring 
them  down? 

"  As  far  as  your  own  business  is  concerned,  I  do 
not  think  that  the  tariff  will  be  reduced  on  your 
products  to  below  the  protective  point,  or  so  low 
as  either  to  encourage  some  foreign  manufacturer 
to  engage  in  the  manufacture  of  your  line  of  machin- 
ery, or  to  make  it  profitable  for  you  to  abandon 


66  INVESTIGATING   AN   INDUSTRY 

your  factory  here  and  have  your  goods  made  abroad; 
but  what  I  do  fear  is  that  the  demand  for  your 
machines  in  this  country  will  be  reduced,  the  factories 
that  buy  them  from  you  not  being  likely  to  invest 
in  new  machinery  when  their  profits  are  tending 
towards  the  vanishing  point. 

"Both  on  account  of  the  threatened  competition 
from  your  rival  and  on  account  of  the  threatened 
reduction  of  the  tariff  and  its  uncertain  effects,  we 
must  prepare  ourselves  for  the  worst.  I  am  going 
to  suggest  certain  changes  in  the  management  of 
the  sales  department  after  we  have  had  a  conference 
with  the  salesmen,  but  whatever  we  do  in  that 
matter  we  must  not  act  rashly.  I  quote  the  following 
from  the  report  of  the  committee  on  'The  Present 
Status  of  Industrial  Management'  presented  at  the 
1912  annual  meeting  of  the  American  Society  of 
Mechanical  Engineers,  and  what  is  said  about 
management  in  a  plant  applies  with  equal  force  to 
management  outside  of  a  plant,  that  is,  in  the  sales 
department: 

The  introduction  of  scientific  modern  management 
in  a  plant  must  be  made  slowly.  The  causes  of  most 
so-called  failures  are  principally  two:  a  failure  of 
the  executives  to  acquire  the  vital  mental  attitude, 
and  too  great  haste  in  application.  The  latter  seems 
to  be  the  dominant  one.  The  committee  feels  com- 
pelled to  emphasize  the  danger  of  attempting  to 
hurry  any  change  in  the  management. 


THE  DOCTOR'S  PRELIMINARY  REPORT          67 

"I  may  say,  however,  without  waiting  for  the 
conference,  that  the  change  I  have  in  mind  is  that  of 
relieving  the  general  manager  from  all  duties  con- 
nected with  the  salejp  department,  except  that  of 
having  a  say  in  regard  to  whether  or  not  new  lines 
of  manufacture  shall  be  undertaken.  Of  course,  I 
would  not  wish  to  make  this  change  without  his  full 
consent  and  approval,  and  I  have  not  yet  planned 
out  xthe  details.  When  I  have  I  shall  have  a  talk 
with  him  about  it." 

Considerable  discussion  followed  the  doctor's  long 
talk,  but  no  fault  was  found  with  his  views,  and  it 
was  agreed  that  no  further  conference  need  be  held 
until  after  the  salesmen  had  arrived. 


CHAPTER  VI 
The  Salesmen's  Conference 

THE  conference  of  the  directors  with  the  three 
salesmen  was  held  on  the  appointed  day.  Each  had 
previously  sent  a  letter  expressing  his  views.  The 
first  was  a  long  one  from  Mr.  Brown,  who  had  for 
two  years  been  covering  western  territory.  It  may 
be  condensed  to  the  following:  His  first  year's 
work  had  been  chiefly  educational,  bringing  his 
goods  to  the  attention  of  prospective  buyers  and 
placing  some  machines  on  trial  for  demonstration 
purposes  and  to  obtain  records  of  performance.  In 
the  second  year  business  had  been  very  good,  and, 
barring  competition,  he  thought  there  would  be 
three  or  four  years  more  of  good  business  getting 
the  machines  placed  in  nearly  all  the  factories  that 
needed  them.  After  that  he  expected  that  business 
would  fall  off,  on  account  of  the  factories  being  all 
supplied,  and  additional  sales  would  only  be  made 
corresponding  to  the  rate  of  growth  of  these  factories 
and  to  the  building  of  new  ones.  In  regard  to  the 
expected  competition,  he  said  that  if  the  rival  house 
put  on  the  market  a  line  of  machines  of  equal  quality 
and  prosecuted  an  active  selling  campaign,  the 


69 

total  yearly  sales  for  the  two  houses  together  might 
be  1 20  per  cent  of  the  present  yearly  rate,  of  which 
he  would  expect  that  we  should  sell  two-thirds,  on 
account  of  the  good  reputation  the  machines  had 
already  made,  leaving  one-third  to  the  rival  house. 
Two- thirds  of  120  is  80  per  cent;  that  is,  the  present 
yearly  sales  would  be  cut  down  20  per  cent,  with  no 
decrease  in  the  total  annual  cost  in  the  selling  depart- 
ment for  salaries,  traveling  expenses  and  advertising. 

" Price-cutting,"  he  said,  "would  be  suicidal. 
Purchasers  are  quite  willing  to  pay  the  present 
prices,  which  are  not  high,  considering  the  quality 
Df  the  goods,  provided  they  know  that  every  other 
purchaser  has  to  pay  the  same  price;  but  if  price- 
fitting  is  once  started,  there  is  no  knowing  where  it 
tvill  stop,  and  customers  will  delay  buying  until 
prices  have  touched  bottom.  By  that  time  profits 
will  have  vanished,  and  the  best  thing  that  could 
be  done  then  would  be  to  liquidate  the  business, 
selling  the  factory  and  stock  in  trade,  including 
^ood  will,  to  your  rival,  who  could  afford  to  pay  a 
better  price  for  them  than  anyone  else  could. 

"The  chief  trouble  with  your  western  business 
is  the  high  cost  of  selling.  Customers  are  far  apart, 
traveling  expenses  are  high,  and  the  amount  of 
sales  that  can  be  made  per  thousand  miles  of  traveling 
and  per  thousand  dollars  of  other  expenses  is  limited. 
I  could  sell  five  times  the  amount  of  goods  in  this 


70  INVESTIGATING   AN   INDUSTRY 

territory  with  no  more  effort  than  I  now  make,  if 
I  had  a  great  enough  variety  of  goods  to  sell. 

"My  proposition  in  regard  to  the  western  country 
is  this:  Cut  down  your  expenses  of  selling  by 
giving  me  the  exclusive  agency  for  all  our  products 
west  of  the  Mississippi  River.  Figure  the  percentage 
that  last  year's  selling  cost  in  this  territory,  including 
special  discounts  to  dealers,  salary,  commissions, 
traveling  expenses,  circulars,  correspondence  and 
postage  (but  not  including  newspaper  advertising), 
bears  to  the  list  price  less  regular  published  discounts, 
and  bill  the  goods  to  me  at  a  discount  equal  to  two- 
thirds  of  that  percentage.  That  is,  on  a  lot  of 
goods  billed  at  $100  (list  less  regular  discount),  if 
the  selling  cost  last  year  was  $60,  leaving  $40  to  the 
factory,  this  year  they  will  be  billed  to  me  at  40  per 
cent  discount,  leaving  $60  to  the  factory.  I  can 
afford  to  do  this  because  I  intend  to  handle  other 
goods  besides  yours,  which  will  not  compete  with 
yours,  of  course,  and  also  because  I  shall  watch 
every  item  of  selling  expense,  and  especially  the 
item  of  special  discounts  to  jobbers  and  other  dealers, 
which  is  now,  I  believe,  extravagantly  large.  If  my 
proposition  is  favorably  considered,  I  can  go  into 
details  concerning  it  at  the  conference." 

The  second  salesman,  Mr.  Smith,  whose  territory 
was  the  central  part  of  the  country,  west  of  Buffalo 
and  east  of  St.  Louis,  and  from  the  Canada  border 


THE  SALESMEN'S  CONFERENCE  71 

to  the  Gulf  of  Mexico,  wrote  a  very  different  kind  of 
letter.  He  said: 

"The  entrance  of  competition  in  our  field  will 
bring  about  a  situation  like  that  of  two  gas  com- 
panies occupying  the  same  streets  with  their  pipes,  or 
two  parallel  railroads,  each  of  which  has  facilities  for 
handling  all  the  traffic.  There  will  be  two  factories, 
two  selling  organizations,  a  duplication  of  traveling 
expenses,  advertising  and  the  like,  to  do  an  amount 
of  business  that  is  scarcely  large  enough  for  a  single 
concern.  It  is  an  economic  waste,  a  waste  of  cap- 
ital and  of  human  energy.  It  leads  to  the  struggle 
of  the  survival  of  the  fittest,  which  impoverishes 
both  parties,  and  finally  destroys  one  of  them.  Now 
my  human  nature  urges  me  to  fight.  I  enjoy  the 
heat  of  the  struggle  more  than  I  do  the  fruits  of 
victory,  and  if  the  directors  decide  on  fighting  and 
proving  that  our  concern  is  the  fittest  to  survive, 
count  on  me  till  the  last  stroke  of  the  battle.  But 
I  recognize  the  fact  that  the  directors  are  trustees 
for  the  stockholders  and  that  they  must  not  make 
the  decision  with  reference  to  any  one's  personal 
feelings,  but  entirely  with  reference  to  the  preserva- 
tion of  the  stockholders'  capital  and  the  earning  of 
dividends.  We  must  not  go  into  battle  unless  we 
know  that  we  are  stronger  than  the  enemy  and  that 
we  are  sure  to  win  before  our  capital  is  exhausted. 

"Now,  from  what  I  can  learn,  the  enemy  is  stronger 


72  INVESTIGATING    AN   INDUSTRY 

than  we  are.  We  have  a  better  and  more  modern 
factory,  and  better  management  inside  of  the  factory, 
but  he  can  modernize  his  factory  and  improve  his 
management  as  soon  as  he  makes  up  his  mind  to 
it;  he  has  more  reserve  capital  than  we  have,  and 
less  expensive  selling  methods  in  proportion  to  the 
extent  of  his  business,  which  is  two  or  three  times  as 
great  as  ours.  When  he  builds  machinery  like  ours, 
it  is  a  matter  of  little  consequence  to  him  whether 
he  sells  twenty  or  forty  or  sixty  per  cent  of  the  total 
demand,  but  it  is  a  matter  of  life  and  death  to  us. 
We  have  followed  Carnegie's  motto,  'put  all  your 
eggs  in  one  basket  and  watch  that  basket,' 1  and  that 
is  our  weakness;  we  may  not  be  able  to  keep  all  the 
eggs  from  being  broken;  while  our  rival  has  followed 
the  opposite  motto,  'have  more  than  one  string  to 
your  bow,'  and  in  that  lies  his  strength.  If  one 
branch  of  his  business  fails,  he  has  others  to  fall  back 
upon. 

"Now,  my  advice  is:    stop  this  competition.     Go 

1  Mr.  Carnegie  did  not  follow  his  own  motto.  He  became  a 
partner  in  the  Union  Iron  Works,  making  iron  bar  and  structural 
shapes,  and  a  stockholder  in  the  Keystone  Bridge  Works;  then 
he,  with  his  partners,  built  the  Edgar  Thomson  Bessemer  Steel 
Works;  then  he  built  blast  furnaces;  bought  the  Homestead 
Works  and  made  it  an  open-hearth  steel  works;  bought  the 
Frick  Coke  Works;  made  armor  plate;  built  the  Bessemer  rail- 
road to  Lake  Erie;  made  an  ore  deal  and  a  steamship  freighting 
deal,  and  threatened  to  build  a  tube  works  on  Lake  Erie,  and 
would  have  built  it  if  he  had  not  been  bought  out  by  the  U.  S. 
Steel  Corporation. — Ed. 


THE  SALESMEN'S  CONFERENCE  73 

to  your  rival  and  ask  him  to  compare  notes  with  you. 
Put  all  your  cards  on  the  table,  face  up,  and  ask  him 
to  do  the  same.  Show  him  that  if  he  really  intends  to 
make  and  sell  your  machines,  you  can  build  your 
machines  more  cheaply  than  he  can  his;  that  if  he 
will  give  you  his  patterns  you  can  contract  to  build 
his  machines  for  him  more  cheaply  than  he  can  build 
them  himself,  because  you  have  a  better  factory  for 
the  purpose,  better  machinery,  and  scientific  manage- 
ment, which  he  has  not;  that  if  he  has  a  more  ex- 
tensive selling  organization  and  lower  selling  costs  on 
account  of  the  greater  magnitude  of  his  business,  you 
can  make  your  selling  costs  still  smaller  by  discharg- 
ing your  salesmen  and  getting  rid  of  their  expensive 
methods  of  getting  trade,  advertising  and  sending 
circulars  to  your  prospective  customers  naming  prices 
which  he  cannot  meet  without  loss.  He  will  no 
doubt  tell  you,  if  he  is  the  average  business  man,  that 
he  knows  his  own  business,  or  at  least  he  thinks  he 
does,  and  that  he  intends  to  proceed  in  the  course 
he  has  laid  out,  until  he  has  tried  it  out  for  a  year 
or  two,  and  that  he  does  not  care  to  enter  into  any 
negotiations  with  you  at  present.  Tell  him  you 
are  in  no  hurry,  that  he  can  think  the  matter  over 
for  a  week  or  two,  and  that  then  he  may  possibly 
have  some  proposition  to  make  to  you,  or  you  may 
have  one  to  make  to  him. 

"In  the  meantime,  prepare  yourself  for  his  final 


74  INVESTIGATING   AN   INDUSTRY 

refusal  to  negotiate  in  any  way.  Find  what  products 
he  is  making  that  are  staples  of  large  and  universal 
demand  and  in  which  there  is  an  open  market,  not 
controlled  by  a  trust  or  ' gentlemen's  agreement,' 
and  in  which  the  entrance  of  one  new  producer  will 
not  tend  to  a  general  cutting  of  prices.  Such  a 
product  is  what  is  needed  for  your  factory  to  keep 
it  running  full  time  in  case  the  demand  for  your 
regular  line  is  divided  by  competition.  Then,  if 
he  insists  on  competing  with  you  in  your  special  line, 
you  can  compete  with  him  in  his  staple  line. 

"If,  however,  he  is  amenable  to  reason,  he  will 
see  that  it  is  a  foolish  waste  of  resources  for  two 
factories  to  be  making  similar  products  of  limited 
demand  when  one  factory  could  make  them  much 
more  cheaply,  and  for  two  selling  organizations  to 
be  competing  when  one  is  easily  able  to  do  all  the 
business.  He  may  be  ready  to  make  you  a  proposi- 
tion to  give  you  all  the  manufacturing  of  his  machines 
and  for  him  to  do  the  selling  of  your  machines  in 
addition  to  his  own,  he  taking  over  your  salesmen, 
who  are  acquainted  with  the  trade,  into  his  organiza- 
tion. Your  lawyers  will  be  able  to  tell  you  whether 
such  an  arrangement  is  a  'combination  in  restraint 
of  trade,'  in  violation  of  the  Sherman  Act.  I  do 
not  think  it  is.  But  if  it  is,  there  are  no  doubt  plenty 
of  other  ways,  and  legal  ways,  by  which  the  economic 
waste  due  to  two  factories  doing  the  work  of  one 


THE  SALESMEN'S  CONFERENCE  75 

may  be  'avoided.  If  the  competition  cannot  be 
avoided,  ruin  stares  you  in  the  face,  and  probably 
the  best  thing  then  to  be  done  is  to  sell  the  factory 
and  retire-  from  business.  The  next  best  thing  is 
to  find  some  other  products  to  make.  I  cannot 
suggest  what  to  make  at  present,  but  I  may  possibly 
think  of  some  before  the  meeting.'' 

The  third  salesman,  Mr.  Robinson,  who  had  charge 
of  the  eastern  district,  wrote  to  the  effect  that  he 
did  not  consider  the  situation  at  all  serious.  "If 
competition  cuts  the  sale  of  our  present  line  in  half," 
said  he,  "let  us  get  another  line.  There  are  plenty 
of  other  things  to  be  made  in  the  world  besides  our 
machines,  and  all  we  have  to  do  is  to  hustle  around 
and  find  something  which  we  can  make  with  our 
factory  equipment  and  for  which  there  is  a  large 
and  steady  demand,  and  go  ahead  and  make  it. 
For  example,  let  us  consider  the  making  of  small 
gasoline  engines  of  i  to  6  horsepower,  for  motor 
boats,  pumps  and  farm  purposes.  There  are  perhaps 
hundreds  of  concerns  making  them,  but  not  over  a 
dozen  making  them  at  the  same  time  of  high  quality 
and  low  factory  cost.  Let  us  make  a  systematic 
investigation  of  the  smaller  factories  that  are  making 
good  engines  but  at  a  high  cost,  and  of  the  factories 
large  and  small  that  are  making  poor  engines  at  all 
kinds  of  costs,  and  see  if  we  can  find  a  set  of  patterns 
and  models  that  can  be  adopted  as  standard  for  a 


76  INVESTIGATING   AN   INDUSTRY 

first-class  engine.  Let  us  standardize  the  bedplates, 
cylinders,  pistons,  connecting  rods,  crank  shafts  and 
all  the  minor  details,  and  prepare  to  make  every 
part  exactly  right.  Then  we  can  offer  to  these 
factories  either  complete  engines  or  any  part  of  an 
engine.  For  some  of  them  we  can  make  and  sell 
them  a  whole  engine  at  a  lower  cost  than  they  can 
make  it  themselves;  for  others  we  can  make  cylin- 
ders or  bedplates  or  pistons  or  small  parts  more 
cheaply  than  they  can  make  them,  and  they  can  do 
the  assembling,  adjusting,  testing  and  selling.  We 
need  not  attempt  to  sell  the  engines  at  retail;  let 
the  present  makers  do  the  selling  while  we  do  the 
manufacturing  of  engines  and  parts  of  engines. 

"I  suggest  only  as  an  example  the  making  of  gaso- 
line engines  for  other  people  to  sell.  There  may  be 
a  hundred  other  things  that  we  can  make  which  offer 
an  equal  or  better  opportunity.  I  have  another 
suggestion  as  an  alternative.  Let  each  of  our  sales- 
men when  he  visits  a  town  to  sell  our  present  line 
visit  the  manufacturers  of  metal  goods  in  that  town, 
and  find  what  part  of  their  product  they  would  rather 
place  contracts  for  outside  than  to  make  it  them- 
selves if  they  could  find  a  contractor  who  would 
make  it  for  them  at  a  low  enough  price.  Few  of 
such  manufacturers  now  make  their  own  bolts  and 
nuts  or  taps  and  dies,  or  small  gears;  they  can  buy 
them  more  cheaply  than  they  can  make  them.  They 


THE  SALESMEN'S  CONFERENCE  77 

would  gladly  buy  shafts  lurried  and  ground  to  size, 
and  many  other  things  if  they  were  offered  sufficient 
inducements.  Let  our  salesmen  get  a  list  of  such 
things,  their  present  cost,  and  the  probable  demand, 
and  then  we  can  select  such  of  them  as  seem  to  be 
the  most  suitable  for  us  and  the  most  profitable,  and 
prepare  to  make  them.  We  might  also  advertise 
ourselves  as  being  a  general  manufacturing  shop  for 
light-  and  medium-weight  metal  products,  giving  a 
list  of  our  machine  tools  with  their  capacity,  and  let 
it  be  known  that  we  have  the  best  facilities  not  only 
for  manufacturing  in  large  quantity  and  at  low  cost, 
but  also  for  designing,  drafting,  model-  and  pattern- 
making,  testing,  and  in  general  assisting  in  develop- 
ing new  machines  for  inventors  and  others.  I  believe 
there  is  a  lot  of  this  kind  of  work  lying  around  waiting 
for  us  to  go  and  hunt  for  it." 

Previous  to  the  meeting  the  directors  and  the 
doctor  had  read  and  discussed  the  salesmen's  letters, 
and  each  salesman  as  soon  as  he  arrived  was  given 
the  letters  of  the  other  two  to  read,  so  that  at  the 
conference  he  would  be  prepared  to  take  part  in  the 
discussion  of  all  the  proposals  that  had  been  made. 
The  doctor  took  the  floor.  "We  have  all  been  going 
on  the  assumption,"  said  he,  "that  this  competition 
is  going  to  be  exceedingly  severe,  cutting  the  amount 
of  our  sales  in  half  and  cutting  prices  to  a  point  that 
will  leave  us  no  profit,  but  we  have  not  made  sure  of 


78  INVESTIGATING   AN   INDUSTRY 

the  facts.  I  therefore  came  to  the  conclusion  before 
Mr.  Smith's  letter  arrived  to  call  on  our  prospective 
competitor  and  learn  from  him  if  possible  just  how 
strong  his  competition  is  going  to  be.  Mr.  Smith's 
letter  gave  me  the  idea  to  sound  him  at  the  same  time 
as  to  his  views  on  some  kind  of  an  arrangement  by 
which  we  might  build  his  machines  as  well  as  our 
own,  while  he  would  do  all  the  selling.  I  found  the 
president  of  the  company  a  most  agreeable  and 
genial  gentleman,  and  he  was  quite  willing,  as  Mr. 
Smith  suggested,  to  lay  all  his  cards  on  the  table,  face 
upwards.  He  showed  me,  in  the  first  place,  that  his 
competition  was  not  going  to  be  nearly  as  severe  as 
we  had  feared.  It  was  always  his  policy,  he  said, 
to  have  'more  than  one  string  to  his  bow,'  to  make 
in  his  factory  a  variety  of  different  products,  so  that 
when  trade  was  dull  in  any  one  line  he  could  put  his 
machinery  and  his  men  on  another  line  for  which 
there  was  a  more  active  demand.  He  was  always  on 
the  lookout  for  some  new  product  to  make,  one  on 
which  the  experimental  and  development  work  had 
already  been  done,  which  had  already  found  some- 
thing of  a  market,  and  on  which  the  margin  between 
factory  cost  and  selling  price  was  large.  He  left  to 
others  the  expensive  work  and  the  risk  of  developing 
new  inventions  and  of  educating  the  public  to  be- 
lieve in  them.  What  he  wanted  was  to  keep  his 
factory  running  full  on  products  for  which  there 


THE  SALESMEN'S  CONFERENCE  79 

/ 

was  a  large  and  steady  market,  keeping  prices  fairly 
low  so  as  to  'hold  his  trade.  By  this  means  the  fixed 
charges  of  both  the  factory  and  the  selling  depart- 
ment were  kept  low  in  proportion  to  the  amount  of 
business  done.  When  his  rivals  began  cutting  prices 
on  any  article,  he  met  them  down  to  a  certain  point, 
and  then  he  stopped  manufacturing  that  article, 
letting  the  rivals  have  the  trade,  while  he  put  his 
factory  on  more  profitable  work.  He  is  an  old- 
fashioned  sort  of  man  and  has  a  stock  of  old-fashioned 
maxims  by  which  he  runs  his  business,  such  as  '  Quick 
sales  and  small  profits';  'Live  and  let  live';  'Don't 
be  a  hog;  give  the  other  man  a  chance';  'Don't  do 
more  business  than  your  capital  warrants';  'A  quick 
turnover  saves  capital';  'Hoe  your  own  row';  'No 
entangling  alliances.'  He  is  entirely  opposed  to 
monopoly  and  to  business  consolidations  of  every 
kind.  He  says  that  Mr.  Smith's  proposed  agreement 
is  a  proposal  to  maintain  high  prices  by  means  of 
a  single  selling  organization,  that  it  means  monopoly 
and  nothing  else,  and  is  opposed 'not  only  to  the  letter 
of  the  Sherman  Act,  but  to  its  interpretation  by  the 
'rule  of  reason'  by  the  Supreme  Court.  The  public, 
he  says,  is  entitled  to  a  share  in  the  savings  that 
accrue  to  a  factory  by  reason  of  its  increasing  volume 
of  business,  for  it  is  the  public  that  makes  that  in- 
crease of  volume.  The  public  also,  he  says,  is 
entitled  to  the  chance  of  getting  the  lower  prices 


80  INVESTIGATING   AN   INDUSTRY 

which  are  due  to  competition,  and  any  combination 
in  restraint  of  trade,  by  which  the  public  is  restrained 
of  its  opportunity  to  get  lower  prices,  is  of  the  same 
nature  in  morals  as  any  other  kind  of  '  hold-up  game.' 
It  is  only  a  question  of  time  when  either  all  such 
combinations  will  be  dissolved  by  the  courts,  or  else 
the  public,  through  its  power  of  constitution-making 
as  well  as  law-making,  will  have  an  interstate  business 
commission  which  will  have  the  same  control  over 
prices  as  the  Interstate  Commerce  Commission  now 
has  over  freight  rates. 

"'Now/  says  our  gentlemanly  rival,  'I  prepared 
to  make  your  kind  of  machines  for  the  same  reason 
that  I  might  have  prepared  to  make  any  other  kind 
of  machines  for  which  my  factory  is  adapted.  I  saw 
there  was  money  in  them,  that  you  were  charging  a 
very  high  price  as  compared  with  the  cost  of  labor 
and  material  that  went  into  them,  that  you  were 
handicapped  by  heavy  selling  expenses  and  by  heavy 
fixed  charges  in  your  factory,  which  was  running  at 
only  half  its  capacity  on  account  of  your  making 
only  a  single  line  of  goods.  The  only  advantage 
you  had  over  me  was  lower  labor  cost,  on  account 
of  your  improved  machinery  and  scientific  manage- 
ment in  your  factory.  To  offset  this  I  have  the 
advantages  of  low  relative  fixed  charges  in  the  factory, 
on  account  of  running  the  factory  full  on  different 
lines,  and  what  I  may  call  scientific  management  in 


THE  SALESMEN'S  CONFERENCE  81 

the  selling  department,  by  which7  every  dollar  spent 
in  that  department  is  watched  to  see  that  it  produces 
a  proper  return./  Suppose  I  had  not  undertaken  to 
make  these  machines.  It  was  only  a  question  of 
time  when  some  one  else  would  make  them.  High 
prices  and  large  margins  for  profits  always  invite 
competition ;  and  if  we  did  combine  it  would  not  be 
long  until  another  competitor  arose. 

1  You  need  not  be  alarmed  about  my  competing 
with  you  on  these  machines.  I  don't  expect  to  cut 
your  prices  the  first  year  more  than  about  ten  per 
cent,  and  I  don't  expect  that  the  business  I  shall  do 
will  be  a  quarter  of  yours.  You  can  easily  recoup 
yourselves  and  retaliate  on  my  concern  by  making 
and  selling  some  of  our  specialties.  You  are  free  to 
make  any  of  them  except  those  that  are  protected  by 
patents.  There  is  no  need  of  our  being  enemies  be- 
cause we  are  rivals  in  business.  When  my  factory 
is  so  full  of  work  that  we  have  to  buy  some  parts  of 
our  product  outside  I  shall  be  glad  to  contract  with 
you  for  any  of  these  parts  that  you  can  make  at  a 
reasonable  price.'" 


CHAPTER  VII 
The  Doctor's  Opinions  and  Recommendations 

THE  doctor  concluded  his  recital  of  his  conversa- 
tion with  the  competitor,  and  said  "  There  is  no  use 
of  considering  further  any  plan  for  stopping  competi- 
tion. We  have  to  meet  the  facts  that  our  volume  of 
sales  is  going  to  be  diminished  and  that  prices  are 
going  to  be  reduced. 

"I  have  been  talking  with  our  general  manager 
and  find  he  is  perfectly  willing  to  be  relieved  of  all 
responsibility  connected  with  the  selling  organization. 
He  recommends  that  a  sales  manager  be  appointed, 
and  that  both  he  and  the  sales  manager  be  made 
directors  of  the  company  so  as  to  bring  them  in 
more  complete  co-operation  than  if  each  of  them 
was  merely  a  servant  of  the  board.  Questions  of 
general  policy  both  as  to  manufacturing  and  selling 
should  be  discussed  and  decided  in  the  meetings  of 
the  board,  but  the  factory  manager  and  the  sales 
manager  should  each  be  supreme  in  his  own  depart- 
ment in  regard  to  details.  I  fully  approve  of  this 
plan. 

"I  am  also  entirely  in  accord  with  Mr.  Robinson's 

suggestion  of  a  systematic  investigation  to  discover 

82 


THE  DOCTOR'S  OPINIONS  83 

what  other  lines  of  manufacture  we  had  best  engage 
in,  and  also  that  we  advertise  for  business  as  a  general 
jobbing  shop. 

"I  think  Mr.  Smith  is  too  pessimistic  in  regard  to 
the  effects  of  competition.  He  writes:  'Two  factories, 
two  selling  organizations,  a  duplication  of  traveling 
expenses,  advertising  and  the  like,  to  do  an  amount 
of  business  that  is  scarcely  large  enough  for  a  single 
concern — economic  waste — survival  of  the  fittest/ 
The  fallacy  in  his  argument  lies  in  the  words  'business 
that  is  scarcely  large  enough  for  a  single  concern/ 
The  amount  of  business  that  we  can  do  is  not  limited 
by  the  total  demand  for  our  special  machines,  for 
we  can  make  other  lines;  it  is  not  limited  by  the 
capacity  of  our  factory,  for  we  can  get  a  large  part  of 
our  work  done  by  contract  outside,  or  if  we  have 
surplus  cash  capital  available  we  can  enlarge  our 
factory;  it  is  limited  only  by  our  efficiency  as  sales- 
men, by  our  ability  to  find  things  that  the  world 
wants  made  and  that  we  can  make,  and  by  the  capital 
we  have,  or  can  get,  with  which  to  enlarge  our  busi- 
ness. As  to  the  survival  of  the  fittest,  our  factory 
is  the  fittest;  it  will  survive  even  if  the  company  that 
owns  it  goes  into  bankruptcy.  The  machines  that  we 
make  are  the  fittest;  they  will  survive,  even  if  we 
cease  to  make  them,  for  they  will  be  made  by  others. 
Our  weak  points  have  been  inertia,  or  our  failure  to 
get  enough  things  to  make  to  keep  the  factory  full 


84  INVESTIGATING   AN   INDUSTRY 

of  work,  and  our  failure  to  find  cheaper  ways  of 
marketing  our  goods.  Both  of  these  failures  are  going 
to  be  remedied,  the  first  by  Mr.  Robinson's  plan  of 
getting  other  work  to  do,  and  the  second  by  a  change 
in  our  selling  methods,  which  includes  the  acceptance 
of  Mr.  Brown's  proposal,  if  we  can  agree  on  details, 
to  be  our  exclusive  western  agent,  and  the  appoint- 
ment of  a  new  sales  manager.  I  have  investigated 
Mr.  Robinson's  past  career,  as  well  as  the  work  he 
has  done  for  this  concern,  and  have  obtained  his 
views  as  to  the  work  of  a  sales  manager,  and  as 
the  result  I  shall  have  the  pleasure  later,  when  we 
come  to  formal  business,  of  nominating  him  for  the 
position." 

Mr.  Robinson  was  then  asked  to  give  his  views, 
and  after  thanking  the  doctor  for  his  kind  words, 
said: 

"  There  are  two  things  that  I  wish  to  speak  of  in 
connection  with  the  future  of  our  business.  The  first 
is  the  necessity  of  conserving  our  capital  so  as  to  be 
able  to  meet  the  shock  of  hard  times,  of  which  there 
are  some  symptoms  in  sight.  While  we  must  extend 
our  business  into  other  lines,  in  order  to  get  enough 
work  to  keep  the  factory  running,  we  must  not  run 
into  any  speculative  ventures  that  will  tie  up  our 
capital.  We  must  not  spend  any  large  sum  on  new 
patterns  or  special  tools,  or  invest  largely  in  the 
manufacture  of  goods  for  which  we  have  not  orders 


THE  DOCTOR'S  OPINIONS  85 

in  advance.  I  would  make  it  a  condition  of  our 
manufacturing  any  new  line  that  it  does  not  involve 
the  use  of  any  more  of  our  capital  than  we  feel  per- 
fectly able  to  afford.  We  must  not  rely  on  banks  to 
help  us  out  of  difficulties  if  hard  times  come.  I  have 
in  mind  the  failure  of  a  firm  with  a  half  million  of 
capital,  while  doing  a  very  profitable  business.  Its 
assets  were:  Real  estate  and  construction,  $600,000; 
stock  in  trade,  bills  and  accounts  receivable,  $1,000,- 
ooo;  bonds,  bills  and  accounts  payable,  $1,200,000. 
Capital  stock  paid  in,  $500,000;  debtor  balance  of 
profit  and  loss  account,  $100,000.  The  assets  were 
$400,000  more  than  the  liabilities,  but  while  $500,000 
cash  capital  had  been  paid  in,  $600,000  had  been 
spent  in  land,  buildings  and  machinery,  making  the 
working  capital  minus  $100,000,  which  had  been 
further  decreased  by  the  losses  of  getting  a  new  busi- 
ness fairly  started.  It  was  at  length  doing  a  fine 
business  at  a  good  profit,  being  carried  along  by  its 
bondholders,  bankers  and  other  creditors.  When 
hard  times  came  the  banks  contracted  its  line  of 
credit,  and  it  had  to  fail.  It  is  a  dangerous  thing  to 
have  a  widely  expanded  business  with  no  available 
reserve  capital  when  a  depression  is  approaching. 

"The  second  idea  I  have  is  that  we  must  prepare 
ourselves  for  great  changes  in  methods  of  doing 
mercantile  business.  Thirty  years  ago  an  iron  works 
owned  one  or  two  blast  furnaces;  it  bought  ore,  coke 


86  INVESTIGATING   AN   INDUSTRY 

and  limestone  from  three  different  concerns;  it  made 
pig  iron  and  sold  it  to  a  rolling  mill,  the  mill  puddled 
the  iron  and  made  it  into  muck  bar,  which  it  sold 
to  another  mill  that  made  it  into  nails,  which  went 
through  wholesaler,  jobber  and  retailer  to  the  final 
consumer.  Here  are  nine  different  selling  transactions 
between  the  material  in  the  ground  and  the  final 
purchaser  of  a  pound  of  nails.  The  day  is  near  at 
hand,  if  it  is  not  already  here,  when  nails  will  be 
bought  in  a  hardware  department  store  which  is 
owned  by  an  iron  and  steel  company  that  mines  its 
own  ore,  coal  and  limestone,  makes  its  own  pig 
iron  and  carries  it  through  all  its  transformations 
until  it  is  made  into  nails.  On  the  other  hand,  we 
have  department  stores  that  own  factories  and  that 
contract  for  the  whole  output  of  other  factories. 
Again  we  have  mail-order  concerns,  like  Sears,  Roe- 
buck &  Co.,  that  sell  the  product  of  hundreds  of 
factories,  and  may,  before  long,  own  a  large  number 
of  them.  Some  day  a  department  store  or  a  mail- 
order concern  or  some  other  kind  of  selling  organiza- 
tion may  come  along  and  want  to  contract  with  us 
to  take  our  whole  output,  or  ask  us  to  act  as  general 
manufacturers,  making  different  things  to  their 
order.  We  may  find  that  it  will  pay  us  well  to 
divorce  our  factory  from  the  selling  organization 
entirely,  and  to  sell  our  output  to  a  new  company, 
in  which  we  may  or  may  not  be  stockholders,  which 


THE  DOCTOR'S  OPINIONS  87 

will  guarantee  to  keep  the  factory  full  of  orders  and 
furnish  it  enough  capital  to  pay  its  material  and  labor 
so  that  it  will  be  relieved  of  the  burden  of  financing. 
We  may  find  it  advisable  to  organize  a  Machinery 
Selling  Co.  ourselves,  with  our  own  and  with  outside 
capital,  to  become  the  general  sales  agency  of  several 
machinery  concerns  that  are  making  different  lines, 
and  are,  therefore,  not  in  competition.  This  is  not 
a  combination  in  restraint  of  trade,  but  it  is  a  com- 
bination for  efficiency,  making  great  savings  in  the 
cost  of  selling,  and  resulting  finally  in  the  reduction 
of  prices  to  the  consumer  while  giving  a  fair  profit 
to  the  manufacturer.  Understand,  I  am  not  propos- 
ing to  organize  any  such  concern  at  present.  I  am 
only  mentioning  it  as  one  of  several  methods  of  re- 
ducing the  cost  of  selling." 

One  of  the  directors  then  addressed  the  meeting 
and  said:  "There  is  one  thing  in  the  doctor's 
method  of  diagnosing  and  prescribing  for  the  diseases 
of  an  industry  that  I  am  especially  pleased  with; 
it  is  that  he  does  not  go  off  at  half-cock  and  express 
an  opinion  before  he  has  carefully  studied  the  facts, 
and  that  when  he  wants  an  opinion  from  others  he 
writes  out  the  questions  and  gives  sufficient  time  for 
them  to  be  studied  and  the  answer  put  in  writing. 
Following  his  example  I  have  written  out  a  question 
as  follows:  'What  is  your  present  opinion  (subject 
to  revision  after  further  study)  of  the  existing  status 


7 


88  INVESTIGATING   AN   INDUSTRY 

of  the  business,  and  what  are  the  steps  that  you 
recommend  be  taken  immediately  and  those  that 
-you  recommend  should  be  postponed  for  the  present 
but  investigated  with  a  view  to  future  action?'  I 
would  like  the  answer  to  be  put  in  writing  so  that  I 
can  take  it  home  and  think  it  over.  Since  the 
Question  does  not  call  for  a  final  opinion  or  report,  but 
only  for  a  provisional  one,  which  the  doctor  can 
amend  to-morrow  if  he  sees  fit,  I  trust  he  may  be  will- 
ing to  dictate  the  answer  at  once,  so  that  each  one 
of  us  may  have  a  typewritten  copy  which  may  be 
used  as  a  basis  for  further  consideration."  The  doctor 
agreed  to  do  this,  but  said  that  on  account  of  no  time 
being  given  him  for  careful  preparation  of  a  written 
opinion,  what  he  would  have  to  say  would  be  frag- 
mentary and  disjointed,  and  it  would  be,  as  stated 
ki  the  question,  " subject  to  revision."  He  then 
dictated  the  following : 

First  as  to  the 'present  status:  Factory. — Location, 
buildings,  machinery,  labor  supply,  scientific  manage- 
\ment  of  production,  all  excellent.  Factory  manager — 
highly  capable,  as  regards  production,  untrained  as 
regards  management  of  sales  and  especially  as  to  de- 
vising future  policy  of  the  business". 

Kind  and  Quality  of  Product. — Excellent,  but  too 
many  sizes  of  some  kinds  are  made,  making  it  neces- 
sary to  keep  on  hand  too  large  a  stock  of  machines 
and  of  more  or  less  finished  parts.  The  design  of 


THE  DOCTOR'S  OPINIONS  89 

\ 

some  machines  might  be  altered  with  a  view  to 
greater  economy  in  their  manufacture. 

Extent  of  the  Market  for  Present  Products  of  the 
Factory. — Only  large  enough  to  keep  the  factory 
running  to  from  one-third  to  one-half  of  its  maximum 
capacity.  Prospects  that  even  this  market  may  be 
curtailed  by  competition  and  by  possible  generaK 
depression  of  trade. 

Sales  Department. — Well  managed  according  to~i 
the  prevailing  methods,  but  costly,  involving  high 
costs  of  distribution  and  high  prices  to  the  final 
consumer.  In  the- western  part  of  the  country  the 
cost  of  distribution  will  be  lowered  by  the  new  con- 
tract with  the  company's  western  representative. 
In  the  rest  of  the  country  the  ratio  of  cost  of  selling 
to  selling  price  will  increase  if  the  volume  of  sales  is 
reduced. 

Plans  for   Future   Development.  —  None   have   as 
yet  been  made.  j 

Capital. — Sufficient  to  keep   the  factory  running' 
to  its  full  capacity  without  large  borrowing  of  money, 
provided  there  is  a  quick  turnover,  so  that  the  lapse 
of  time  from  purchase  of  raw  material  to  the  collec- 
tion of  bills  for  goods  made  of  this  material  is  from 
three  to  six  months ;  insufficient  if  there  is  a  slow  turn- 
over, due  to  large  amount  of  raw  and  partly  finished    , 
material,  to  large  stocks  of  finished  goods  awaiting 
sale  and  to  slow  collections;  insufficient  also  to  allow 


90  INVESTIGATING   AN   INDUSTRY 

for  any  large  expenditure  of  money  to  improve  the 
power  plant  and  to  change  designs  and  patterns  for 
the  purpose  of  cheapening  cost  of  production. 

Next,  as  to  recommendations: 

Factory  and  Product. — Make  no  changes  either  in 
the  equipment  of  the  factory  or  in  its  system  of  ad- 
ministration at  present.  Employ  a  power-plant 
expert  to  make  a  preliminary  report  on  what  had  best 
be  done  to  decrease  the  consumption  of  coal  used  by 
the  power,  lighting  and  heating  plant,  and  on  what 
advantage,  if  any,  there  would  be  in  purchasing 
current  for  power  and  light  from  the  central  station. 
Have  the  chief  draftsman  report  what  benefits  would 
accrue  from  minor  changes  in  design  with  a  view  to 
cheapening  cost  of  production.  Have  the  general 
manager  report  what  objections  there  are  to  abandon- 
ing the  making  of  the  smaller  sizes  of  some  of  the 
products,  and  the  advantage  that  would  result  from 
this  course.  Have  him  report  also  on  the  desirability 
of  purchasing  from  other  manufacturers  certain  small 
parts  instead  of  making  them  in  the  factory,  assum- 
ing that  the  machine  tools  now  used  for  making 
them  could  be  employed  for  a  large  fraction  of  their 
time  in  making  other  things. 

Extent  of  the  Market. — Have  the  sales  manager 
interview  some  manufacturers  of  machinery  who 
have  established  a  foreign  trade,  export  agents,  and 
others  who  may  be  posted  on  the  export  trade  in 


THE  DOCTOR'S  OPINIONS  91 

American  machines,  and  get  some  information  as 
to  the  possibility  of  doing  an  export  business  in  our 
products  and  as  to  the  ways  and  means  of  starting 
such  business.  One  of  his  clerks  might  examine  the 
files  of  consular  reports  to  find  if  any  of  them  contain 
any  useful  information  as  to  the  prospects  of  a  foreign 
trade  in  our  goods.  He  should  also  write  to  the 
American  Association  of  Commerce  and  Trade  in 
Berlin,  59-60  Friedrichstrasse,  Geo.  S.  Atwood, 
Secretary,  asking  for  a  copy  of  the  Year  Book  of  that 
association  for  1912,  in  which  will  be  found  some 
information  on  the  subject  of  American  exports  to 
Germany.  The  association  has  been  in  existence 
since  1903,  and  one  of  its  chief  tasks  is  that  of  giving 
assistance  in  the  introduction  of  American  goods  into 
Germany. 

Sales  Department. — This  department  should  im- 
mediately start  investigations  on  two  lines:  first,  the 
possibility  of  diminishing  the  cost  of  distribution,  so 
that  our  selling  price  may  be  reduced  without  greatly 
reducing  our  profits;  and,  second,  to  discover  what 
other  products  the  factory  can  make  that  will  meet 
with  a  large  sale  at  a  reasonably  good  profit.  The 
reputation  of  our  present  line  of  goods  is  now  so  well 
established  that  it  is  probable  that  dealers  may  be 
found  in  every  large  city  who  would  be  willing  to 
take  agencies  for  them  at  a  low  discount.  Care  must 
be  taken,  however,  to  insure  that  such  agents  are 


92  INVESTIGATING   AN   INDUSTRY 

already  noted  for  handling  only  goods  of  the  highest 
quality  and  for  their  enterprise  in  covering  thoroughly 
their  respective  districts. 

For  the  purpose  of  discovering  what  other  goods 
may  be  profitably  made  a  conference  should  be  had 
between  the  general  manager  and  the  mechanical 
expert  with  whom  we  have  already  been  in  consulta- 
tion, the  sales  manager  and  our  other  salesmen,  with 
a  view  of  making  a  list  of  machines,  and  also  of  parts 
of  machines,  which  may  be  made  with  our  present 
equipment  of  machine  tools,  and  which  are  in  large 
demand.  This  list  should  then  be  used  by  our 
salesmen  in  making  a  thorough  canvass  of  the  country 
for  the  purpose  of  securing  information  that  may  be 
used  as  a  basis  for  beginning  negotiations  with  dealers 
and  with  factory  owners  who  may  be  induced  to 
purchase  from  us  such  machines  or  parts  of  machines. 
We  might  prepare  circulars  and  advertisements 
reciting  in  plain  language  these  facts:  that  we  have 
a  large,  modern  factory  equipped  with  the  best 
modern  tools,  planers,  shapers,  slotters,  lathes,  drills, 
single  and  multiple  milling  machines  of  various 
classes,  boring  machines,  turret  lathes,  grinding 
machines,  etc.  (naming  the  sizes  and  capacities  of 
each  class  of  tools),  together  with  a  capable  engineer- 
ing force,  including  designers  and  draftsmen,  a  forge 
shop  and  a  pattern  shop;  that  we  are  now  engaged 
in  building  special  machines  the  demand  for  which  is 


93 

not  sufficient  to  keep  the  factory  engaged  for  more 
than  half  its  time  at  full  capacity;  that  we  are  pre- 
pared to  do  a  jobbing  and  contracting  business  rang- 
ing from  the  design  and  pattern  work  for  single 
machines  for  special  use  up  to  manufacturing  standard 
articles  on  a  large  scale;  that  we  are  prepared  to 
make  parts  of  machines,  such  as  crank  shafts,  con- 
necting rods,  springs,  bearings,  hand  wheels,  gears, 
etc.,  that  are  in  general  use,  at  lower  cost  than  they 
are  made  in  most  factories,  and  that  we  will  guarantee 
these  parts  to  be  of  the  highest  class  both  in  material 
and  workmanship. 

We  should  establish  standard  dimensions  for  most 
of  these  parts  and  do  what  we  can  to  encourage  the 
use  of  such  standards,  so  that  we  can  manufacture 
them  in  large  quantities,  and  therefore  at  the  lowest 
cost. 

Capital. — The  working  capital  of  the  company  is 
sufficient  for  the  present  extent  of  the  business  and  for 
a  moderate  expansion  not  requiring  any  investment 
for  additional  equipment.  More  concerns  have  gone 
into  bankruptcy  for  lack  of  sufficient  capital  to  pro- 
vide for  extensions  and  to  endure  financial  crises  than 
from  any  other  one  cause.  We  are  now  facing  a 
probable  depression  in  trade,  and  it  is  therefore  highly 
important  that  we  conserve  our  capital  and  do  not 
make  any  new  ventures  until  the  danger  is  past.  It 
is  equally  important,  however,  that  we  prepare  for 


94  INVESTIGATING   AN   INDUSTRY 

the  next  boom,  which  is  certain  to  follow  the  depres- 
sion, by  getting  such  new  equipment  as  may  be 
necessary  to  take  care  of  the  increased  business,  and 
also  either  obtain  the  additional  capital  needed  to 
handle  it  or  else  to  change  our  business  methods  so 
as  to  utilize  our  present  capital  more  efficiently.  In 
the  manufacturing  department  this  may  be  done  by 
a  careful  supervision  of  our  purchases,  so  that  raw 
material  is  not  purchased  too  long  in  advance,  and  by 
such  a  planning  of  the  passage  of  the  material  through 
the  shop  that  too  much  capital  is  not  locked  up  in 
partly  finished  product.  In  the  selling  department 
we  can  utilize  capital  more  efficiently  by  not  giving 
so  long  credits  and  by  greater  promptness  in  making 
collections. 

When  the  business  increases  to  such  an  extent 
that  more  working  capital  is  needed  to  handle  it,  we 
may  get  along  for  a  time  by  using  our  credit,  pur- 
chasing material  on  longer  time,  or  borrowing  money 
from  the  banks,  but  these  methods  are  exceedingly 
dangerous,  involving  not  only  the  cost  of  interest, 
but  the  risk  of  being  squeezed  by  the  banks  or  other 
creditors  when  our  credit  is  stretched  beyond  a  safe 
limit.  The  issuing  of  bonds  is  a  safer  way,  but  this 
is  apt  to  lead  to  disastrous  results  when  the  bonded 
indebtedness  amounts  to  a  large  fraction  of  the 
total  capital.  The  only  safe  way  is  to  obtain  increased 
capital  by  the  issue  of  new  stock.  This  is  easy  to 


THE  DOCTOR'S  OPINIONS  95 

do  when  the  times  are  good,  when  the  business  is 
profitable  and  the  surplus  is  regularly  increasing, 
but  extremely  difficult  in  times  of  depression,  when 
money  for  investment  is  scarce  and  when  those  who 
have  money  are  timid.  We  have  seen  in  recent  times 
many  examples  of  large  concerns  doing  a  highly 
profitable  business  going  into  the  hands  of  receivers 
because  the  business  had  expanded  beyond  the  point 
justified  by  the  available  working  capital. 

The  doctor  then  concluded  his  dictation  by  saying 
that  he  had  no  more  recommendations  to  make  that 
day,  but  that  he  might  have  something  more  to  say 
on  the  morrow,  after  he  had  read  over  the  type- 
written copy  of  what  he  had  already  said.  The 
meeting  then  adjourned. 


CHAPTER  VIII 
Proposed  Reorganization  of  the  Board  of  Directors 

THE  next  day  the  conference  with  the  salesmen 
was  continued,  but  none  of  them  had  anything  of 
importance  to  contribute  and  the  conference  soon 
adjourned,  the  salesmen  retiring;  the  directors 
asked  the  doctor  if  he  had  revised  what  he  had 
dictated  the  preceding  day,  and  if  he  had  any  further 
recommendations  to  make.  He  replied  that  he  had 
read  it  over,  and  had  no  alterations  to  make  in  it, 
but  he  wished  to  say  something  more,  but  not  for 
record,  as  it  was  only  a  preliminary  statement,  which 
would  precede  a  proposal  he  had  written  out.  He 
said: 

"When  I  was  a  practising  physician  I  sometimes 
had  to  use  strong  language  to  my  patients  in  order  to 
give  them  a  realizing  sense  of  their  ignorance  or  neglect 
of  the  rules  of  health,  and  I  think  some  strong  language 
is  now  needed  in  regard  to  your  management  of  this 
business.  Why  do  you  have  directors  who  are  mere 
figureheads,  who  know  nothing  of  any  manufacturing 
business  and  whose  only  function  is  to  meet  once  a 
month  and  hear  your  general  manager  tell  you  how 
the  business  is  running  and  to  tell  him  to  go  ahead  as 

96 


PROPOSED    REORGANIZATION  97 

he  is  doing?  You  are  not  directing,  you  are  merely 
shifting  your  responsibility  to  the  stockholders  onto 
one  man  and  giving  him  a  load  that  is  too  heavy  for 
one  man  to  carry.  What  you  should  do  is  to  get  a 
board  of  directors  who  can  become  acquainted  with 
the  business  by  having  a  working  connection  with  it 
and  who  thereby  may  qualify  themselves  to  direct. 
You  are  not  a  board  of  directors,  you  are  only  a 
stockholders'  committee,  and  you  represent  the 
stockholders  merely  by  attending  meetings  and  re- 
ceiving reports.  Of  course  you  will  answer  that  the 
stockholders  must  elect  from  their  own  number 
directors  who  will  represent  them  and  watch  the  ex- 
penditure of  money.  I  will  admit  that  you  have  done 
this  watching  well,  that  is  you  have  verified  all  the 
vouchers  and  satisfied  yourselves  that  the  purchasing 
has.  been  done  honestly  and  wisely,  that  salaries  have 
not  been  extravagant,  that  labor  has  not  been  over- 
paid, and  that  there  is  no  graft  in  any  part  of  the 
business;  but  all  this  could  be  done  by  a  stockholders' 
committee  or  by  a  paid  auditor.  Expenditure  of 
money  is  only  one  part  of  the  business;  you  have 
neglected  the  other  and  the  greater  part,  which  is 
income.  You  have  not  planned  ahead  so  as  to  in- 
sure that  you  will  have  an  income  to  meet  the  ex- 
penditure. You  have  not  only  neglected  this  duty, 
but  you  have  never  discovered  that  it  is  your  duty." 
The  doctor  stopped  to  take  breath,  and  one  of 


98  INVESTIGATING   AN   INDUSTRY 

the  directors  interjected,  "It  seems  to  me,  doctor, 
that  you  are  forgetting  one  of  your  own  mottoes, 
'too  many  cooks  spoil  the  broth,'  and  another  one, 
'never  to  do  anything  that  you  can  hire  another  man 
to  do  better  than  you  can  do  it  yourself.'  We  direct- 
ors, a  wholesale  grocer,  real  estate  operator,  treasurer 
of  an  insurance  company,  and  the  like,  being  aware 
that  we  know  nothing  of  manufacturing,  thought  we 
were  doing  well  in  employing  an  able  general  man- 
ager who  was  willing  to  assume  the  Responsibility  of 
the  whole  work  and  trust  him  to  run  the  business. 
If  we  had  interfered  with  him  and  nagged  him  we 
would  not  have  been  able  to  keep  him."  ^ 

The  doctor  replied,  "I  thought  I  made-it  clear 
when  I  spoke  the  other  day  of  mottoes  and  maxims 
that  none  of  them  can  be  taken  without  limitations, 
and  that  there  is  an  antidote  available  when  any  one 
of  them  is  taken  in  excess.  To  the  first  of  your  mot- 
toes we  have,  'in  the  multitude  of  counselors  there  is 
wisdom,'  and,  to 'the  second^  'never  overwork  a 
willing  horse.'  I  do  not  mean  that  you  directors 
should  undertake  to  be  counselors,  for  you  are  not 
qualified  to  be;  the  counselors  should  be  experts. 
As  for  the  'willing  horse,'  the  general  manager,  as 
long  as  the  business  consisted  ^n  manufacturing  a 
single  line  of  goods,  and  as  long  as  he  had  the  good 
luck  to  get  salesmen  who  knew  how  to  dispose  of 
them,  he  was  not  overworked,  but  as  you  yourselves 


PROPOSED   REORGANIZATION  99 

have  said,  his  mind  'runs  on  a  single  track,'  and  he 
would  be  overworked  if  you  had  put  on  him  the 
responsibility  of  developing  the  business  along  new 
lines.  Fortunately,  this  extra  responsibility  has  not 
been  placed  on  him,  and  no  harm  has  yet  been  done, 
but  we  have  now  reached  the  developing  stage,  and 
we  must  now  plan  out  for  the  future. 

"What  I  now  propose  is  a  new  organization,  begin- 
ning witk  a  new  board  of  directors,  some  of  whom  at 
least  shall  be  active  officers' of  the  corporation  doing 
actual  work  ir>  one,  or  more  departments.  Those 
directors  who  retire  because  it  is.  inconvenient  for 
them  to  take  their  share  of  the  work  may  be  con- 
stituted a  stockholders'  committee,  whose  duty  is  to 
meet  from  twp>to  f our '  times  a  year  to  receive  and  dis- 
cuss reports  made  by  the  board  of  directors,  and  who 
may,  if  they  see  fit,  employ /mce  a  year  an  auditor  to 
examine  the  books,  and  a  business  expert  to  report 
on  the  conduct  and  the  prospects  of  the  business. 

"One  of  the  elements  of  scientific  management  as 
now  employed  in  the  production  of  manufactured 
goods  is  the  use  of  t functionalized  foremen.'  I  now 
propose  to  functionalize  the  directors,  giving  each  of 
them  the  specific  ^vork  to  clo  for  which  he  is  best 
fitted,  and  to  have  the  whole  business  supervised  by 
functional  committees,  qf  each  of  which  the  chair- 
man is  the  executive  head^of  a  department  and  the 
other  members  are  his  advisers  and  assistants.  I 


100  INVESTIGATING   AN   INDUSTRY 

suggest  that  the  few  principal  stockholders,  who  hold 
a  large  majority  of  the  stock,  get  together  and  select 
from  their  number  three  directors,  who  are  versed  in 
general  finance,  who  will  serve  for  nominal  salaries  as 
president,  vice-president,  and  treasurer,  the  duties 
of  their  offices  being  so  arranged  as  to  take  but  a  small 
portion  of  their  time;  also  four  other  directors,  three 
of  whom,  the  general  manager,  the  sales  manager, 
and  the  secretary,  shall  receive  proper  compensation 
for  their  full  time,  and  the  fourth,  whom  I  shall  call 
the  'adviser/  shall  serve  without  salary.  If  it  may 
please  you,  I  nominate  myself  for  this  position,  and 
you  may  give  me  one  share  of  stock  to  qualify  me  to 
be  a  director.  For  the  position  of  secretary  I  would 
nominate  our  excellent  chief  clerk  of  the  sales  depart- 
ment, who  is  a  broad  enough  man  to  fill  a  more  re- 
sponsible position  than  the  one  he  now  holds. 

"The  first  work  of  the  new  board  of  directors  will 
be  to  plan  the  complete  organization  of  the  business, 
to  frame  a  new  set  of  by-laws  establishing  functional 
committees  of  the  directors,  and  defining  the  duties 
and  authority  of  the  committees  and  of  the  executive 
officers.  I  have  written  out  a  plan  of  organization 
which  I  will  submit  for  discussion. 

"I  divftle  the  whole  business  into  seven  departments, 
each  of  which  is  supervised  by  a  functional  committee, 
as  follows:  (i)  Finance;  (2)  Accounts;  (3)  Informa- 
tion and  Statistics;  (4)  Factory;  (5)  Labor;  (6) 


PROPOSED    REORGANIZATION  101 

Sales,  and  (7)  New  Development.    The  committees 
I  would  form  as  follows : 

(1)  Finance. — President,  general  manager,  adviser. 

(2)  Accounts. — Vice-president,  treasurer,  secretary. 

(3)  Information   and   Statistics. — Secretary,   vice- 
president. 

(4)  Factory. — General     manager,     adviser,     sales 
manager. 

(5)  Labor. — Secretary,  general  manager. 

(6)  Sales. — Sales     manager,      general      manager, 
secretary. 

(7)  New    Development. — Sales    manager,    general 
manager,  treasurer. 

"The  reasons  for  the  assignment  of  the  several 
officers  to  their  respective  committees,  and  the  func- 
tions of  each  officer  are  as  follows: 

"(i)  Finance. — The  president,  being  one  of  the 
largest  stockholders,  should  be  the  leader  in  important 
financial  matters,  such  as  banking,  borrowing,  issuing 
of  bonds  and  stock,  expansion  or  contraction  of  the 
business,  and  granting  of  credit.  The  general  man- 
ager should  be  in  touch  with  him,  to  inform  him  of  the 
financial  needs  of  the  factory,  and  the  adviser  may  be 
of  assistance  in  bringing  financial  information  from 
outside.  This  committee  should  if  possible  come 
to  an  agreement  before  submitting  financial  proposi- 
tions to  the  full  board  of  directors. 

"(2)  Accounts. — The  vice-president,  being  a  large 


102  INVESTIGATING   AN   INDUSTRY 

stockholder,  will  be  interested  in  obtaining  a  proper 
system  of  keeping  accounts,  and  in  studying  the  ac- 
counts and  drawing  conclusions  from  them  which  he 
may  submit  to  the  finance  committee.  The  treasurer 
will  see  that  the  accounts  are  so  kept  as  to  give  him 
the  information  he  needs  when  questions  come  up 
as  to  dividends,  investment  of  money,  delaying  pur- 
chases in  order  to  conserve  the  bank  balance,  pur- 
chasing ahead  in  order  to  get  the  advantage  of  low 
prices,  and  the  like.  The  actual  work  of  keeping 
the  accounts  is  to  be  done  by  the  secretary  and 
his  clerks. 

"  (3)  The  whole  system  of  filing  of  correspondence, 
price  lists,  catalogs,  etc.,  and  the  keeping  of  a  bureau 
of  information  for  every  department  of  the  business 
should  be  in  charge  of  the  secretary.  He  should  also 
compile  monthly  and  annual  statistics  and  charts  of 
all  important  facts  that  may  be  needed  by  any  de- 
partment. The  vice-president  is  made  a  member  of 
this  committee  as  well  as  that  of  the  committee  on 
accounts  so  that  he  may  have  a  say  in  deciding  what 
statistics  and  charts  should  be  kept,  and  so  that  he 
may  have  all  facilities  needed  for  drawing  all  the  con- 
clusions that  may  be  drawn  from  statistics,  which  in 
themselves  are  of  no  importance  unless  they  lead  to 
conclusions.  It  is  advisable  also  that  the  vice- 
president  add  to  the  duties  of  his  position  the  func- 
tions of  a  'leak  hunter/  or  if  he  is  not  able  to  perform 


PROPOSED    REORGANIZATION  103 

these  functions  himself,  he  may  have  them  done  by  a 
subordinate,  who  preferably  should  be  an  experienced 
engineer,  and  who  may  be  given  the  title  of  assistant 
to  the  vice-president.  (See  editorial  article  on 
The  Leak  Hunter,  Industrial  Engineering,  March, 


"(4)  Factory.  —  The  general  manager  should  re- 
tain his  present  position  as  autocrat  of  the  factory, 
but  he  should  consult  with  the  adviser,  who  may 
bring  him  information  as  to  what  is  being  done  in 
other  factories,  and  with  the  sales  manager,  who 
can  inform  him  as  to  prospective  demand  for  the 
different  products,  to  enable  him  to  prepare  ahead  to 
meet  the  increased  demand,  or  to  delay  the  production 
of  some  lines  so  as  to  avoid  piling  up  stock.  He 
should  consult  with  his  committee  in  regard  to  im- 
portant changes  in  equipment  or  manufacturing 
methods,  and  obtain  the  approval  of  the  committee 
before  making  propositions  to  the  board  of  directors. 

"(5)  The  formation  of  a  labor  committee  is  for 
the  purpose  of  throwing  upon  the  secretary,  who  has 
statistics  of  labor  costs,  records  of  workmen  and  the 
like,  much  of  the  burden  with  which  general  managers 
are  usually  oppressed,  of  handling  all  questions  re- 
lating to  wages,  promotions,  working  conditions, 
welfare  work  and  the  like.  The  general  manager  and 


1  See  Appendix. 


104  INVESTIGATING   AN   INDUSTRY 

the  secretary  can  agree  upon  a  satisfactory  division 
of  the  work  of  this  committee  between  them. 

"(6)  Sales. — The  sales  manager  is  the  autocrat  of 
the  sales  department  in  so  far  as  handling  the  sales- 
men is  concerned,  but  he  should  consult  with  the 
general  manager  as  to  the  advisability  of  pushing 
certain  lines  so  as  to  keep  certain  parts  of  the  factory 
full  of  work,  and  with  the  secretary  as  to  statistics 
of  cost  of  production  and  of  selling,  so  that  he  may 
know  which  lines  should  be  pushed  the  hardest  in 
order  to  obtain  a  maximum  annual  profit.  Questions 
of  changes  of  prices  and  of  important  contracts 
should  be  discussed  by  the  full  committee. 

"(7)  New  Development. — This  committee  should 
have  constantly  before  it  the  question  of  what  to 
make  and  what  not  to  make,  and  the  duty  of  dis- 
covering new  lines  in  which  a  good  profit  can  be 
made.  The  treasurer  is  made  a  member  of  this 
committee  as  a  check  against  its  undertaking  a  new 
line  of  work  before  the  capital  is  available  for  it. 
The  secretary  might  be  added  to  this  committee  if 
it  appears  that  his  information  bureau  and  his  statistics 
put  him  in  position  to  be  of  service  to  the  committee. 
Such  questions  as  the  one  now  before  us,  that  of 
methods  of  meeting  new  competition,  may  be  referred 
to  this  committee  for  investigation  and  report  to  the 
board  of  directors.  The  committee  should  prepare 
annually  a  report  giving  the  results  of  its  work,  and 


PROPOSED    REORGANIZATION  105 

recommending  what  new  work  should  be  undertaken 
or  what  old  lines  modified  or  abandoned. 

"  Foremen's  Committee. — In  addition  to  the  com- 
mittees of  directors,  I  would  recommend  the  formation 
of  a  committee  of  three  foremen,  taken  in  rotation 
from  the  whole  body  of  foremen,  each  member  serv- 
ing one  year,  with  one  member  entering  and  one 
leaving  the  committee  at  the  end  of  each  four  months. 
The  duties  of  this  committee  are:  (a)  Advisory,  to 
consider  and  report  to  the  general  manager  on  acci- 
dents and  their  prevention;  condition  of  machinery; 
comfort  and  welfare  of  the  workmen;  old  age  and 
disability  pensions;  apprenticeship  system;  improve- 
ments of  the  factory  or  factory  methods;  complaints 
by  foremen  or  workingmen.  (b)  Executive.  Author- 
ity may  be  given  by  the  board  of  directors  to  this 
committee  to  take  action  on  any  matters  that  may 
be  referred  to  it  by  the  board.  A  formal  report  of 
its  proceedings  should  be  made  by  this  committee 
to  the  board  three  times  a  year,  and  special  re- 
ports whenever  they  are  called  for  by  the  general 
manager. 

"Understudies. — The  three  high-salaried  officers, 
the  general  manager,  the  sales  manager  and  the 
secretary,  should  each  be  provided  with  an  assistant, 
who  should  be  trained  to  become  so  familiar  with 
all  the  details  of  the  work  of  his  chief  that  he  would 
be  competent  to  fill  his  place  during  his  temporary 


106  INVESTIGATING   AN   INDUSTRY 

absence  and  finally  to  succeed  him  in  the  event  of 
his  retirement." 

The  doctor  finished  his  reading,  and  proceeded 
orally  as  follows: 

"I  have  typewritten  copies  of  this  document  for 
each  of  you.  I  wish  you  would  study  it  to-night  at 
home  and  come  prepared  to  discuss  it  to-morrow.  I 
do  not  think  it  will  be  profitable  to  discuss  it  now.  I 
wish  to  call  particular  attention  to  the  fact  that  the 
principal  element  in  my  proposition  is  a  re-constitu- 
tion of  the  board  of  directors,  making  it  a  working 
body  instead  of  a  stockholders'  committee.  It  does 
not  need  to  meet  as  a  board  in  formal  session  oftener 
than  four  times  a  year,  but  its  members  should  be 
always  working  either  as  executive  officers  or  as 
members  of  functional  committees.  All  the  other 
suggestions  I  have  made  are  subordinate  to  this  one, 
and,  if  thought  best,  their  consideration  may  be 
postponed  until  the  first  meeting  of  the  new  board. 
The  titles  and  composition  of  the  several  committees 
may  be  left  to  the  board,  and  special  committees  may 
be  formed  for  either  temporary  or  permanent  pur- 
poses; thus  the  president,  vice-president  and  general 
manager  might  be  made  a  committee  on  new  buildings, 
with  authority  to  employ  an  architectural  engineer, 
and  the  vice-president,  treasurer  and  general  manager 
might  form  a  committee  on  purchases,  with  authority 
to  appoint  a  purchasing  agent  and  to  exercise  such 


PROPOSED    REORGANIZATION  107 

supervision  over  his  work  as  may  be  needed.  The 
board  might  also  authorize  the  regular  committees 
to  employ  experts  to  aid  them  in  their  several  func- 
tions; thus  the  finance  committee  might  want  to 
employ  legal  counsel;  the  committee  on  accounts  an 
auditor  or  expert  accountant;  the  factory  committee 
a  power  plant  and  a  mechanical  expert;  the  labor 
committee  an  expert  on  sanitation  or  on  welfare 
work;  the  sales  committee  an  advertising  expert. 

"I  regard  as  the  most  important  of  the  functional 
committees  at  the  present  time  the  one  on  new  devel- 
opment. Its  work  in  recommending  to  the  directors, 
after  thorough  investigation,  what  to  make  and  what 
not  to  make,  is  that  upon  which  the  future  success 
of  the  business  may  depend.  Its  mistakes  may  be 
more  costly  than  those  of  any  other  committee.  The 
usual  mistake  is  that  of  underestimating  the  amount 
of  capital  required  to  develop  a  new  line.  In  this 
connection  the  following  press  despatch  in  this 
morning's  paper  may  be  of  interest  as  a  warning: 

A  receiver  was  appointed  today  for  the  Michigan 
Buggy  Co.  of  Kalamazoo,  manufacturers  of  the 
Michigan  "40"  automobile.  It  is  stated  that  the 
liabilities  will  total  $i  ,600,000.  The  Company  manu- 
factured buggies  for  thirty  years.  Insufficient  funds 
to  conduct  its  business  since  the  manufacture  of 
automobiles  was  begun  was  a  reason  given  for  the 
receivership. 


108  INVESTIGATING   AN   INDUSTRY 

"I  think  we  had  better  now  adjourn  until  to- 
morrow afternoon,  so  that  you  may  discuss  during 
the  morning  the  substance  of  my  proposals. 

One  of  the  directors  said,  "I  don't  want  to  discuss 
the  matter  now,  but  it  seems  to  me  that  the  doctor  is 
proposing  to  have  an  enormous  amount  of  red  tape 
in  this  business."  The  doctor  replied,  "One  of  the 
essential  elements  of  scientific  management  is  study 
of  the  subject  of  waste,  whether  of  capital,  material, 
or  time,  or  even  of  ink  and  of  red  tape.  The  work  of 
the  committee  on  information  and  statistics,  and 
especially  that  of  the  'leak  hunter/  will  include  the 
study  of  whether  the  excessive  use  of  red  tape  hinders 
the  progress  of  work  or  is  costly  in  itself,  and  of 
finding  ways  by  which  the  use  of  red  tape  may  be 
curtailed.  The  words  'red  tape'  are  now  used,  as 
you  know,  to  signify  any  systematic  method  of 
making  records,  issuing  requisitions  or  orders,  check- 
ing against  mistakes,  countersigning  checks  and  the 
like.  In  scientific  management  properly  applied  this 
so-called  red  tape  is  used  only  so  far  as  investigation 
shows  it  to  be  necessary  or  desirable,  and  automatic 
machinery  or  other  means  are  used  to  make  the 
quantity  of  it  as  little  as  possible." 


L 


CHAPTER  IX 

Duties  of  the  Functional  Committees  of  the  Board 
of  Directors 

THE  next  afternoon  another  meeting  was  held  as 
agreed,  and  the  president  of  the  company  said, 
"Doctor,  we  had  a  meeting  this  morning  at  which 
all  the  directors  were  present  and  four-fifths  of  the 
stock  was  represented,  and  after  a  thorough  dis- 
cussion of  your  proposal  it  was  unanimously  agreed 
to  accept  the  principal  one,  that  of  reorganization 
of  the  board  of  directors.  We  agreed  also  that  the 
president,  vice-president,  and  treasurer  retain  their 
present  offices,  and  that  the  other  four  directors  re- 
sign, their  places  to  be  taken  by  the  general  manager, 
the  sales  manager,  the  chief  clerk  of  the  sales  depart- 
ment, who  will  be  appointed  secretary,  and  yourself. 
Our  present  constitution  provides  that  the  board 
may  fill  vacancies  in  the  directorships,  the  new  mem- 
bers to  serve  until  the  annual  meeting  of  the  stock- 
holders. A  special  meeting  of  the  stockholders  will 
be  held  in  two  weeks  to  make  the  changes  in  the 
constitution  and  by-laws  that  may  be  necessary  to 
fix  the  duties  of  officers  and  to  provide  for  forming 
the  functional  committees  and  specifying  their 

109 


110  INVESTIGATING   AN   INDUSTRY 

duties.  We  can  have  a  meeting  of  the  directors  to- 
morrow, at  which  the  resignation  of  the  four  directors 
can  be  accepted  one  by  one  and  their  successors 
elected,  and  at  which  any  other  formal  business  may 
be  transacted.  We  shall  be  glad  to  hear  from  you, 
doctor,  if  you  have  any  other  suggestions  to 
make." 

The  doctor,  after  thanking  the  directors  for  the 
compliment  paid  him  in  accepting  his  proposal  and 
in  nominating  him  as  a  director,  said: 

"My  work  as  adviser  to  the  present  board  of 
directors  is  now  finished,  and  I  have  no  further  sug- 
gestions to  offer,  but  I  have  spent  the  morning  in 
making  a  partial  list  of  the  many  different  things  that 
have  to  be  considered  in  connection  with  a  manu- 
facturing and  selling  business,  and  I  have  tried  to 
assign  the  several  items  to  their  proper  places  under 
seven  heads  corresponding  to  the  seven  functional 
committees:  finance,  accounts,  information  and 
statistics,  factory,  labor,  sales,  and  new  developments. 
I  shall  refer  this  list  to  the  new  board,  and  ask  that 
it  be  carefully  studied  and  revised  to  insure  that  no 
important  item  is  left  out  and  that  each  is  assigned 
to  the  proper  committee.  When  it  is  finally  revised 
I  shall  ask  that  it  be  printed  on  cardboard  so  that 
each  director  may  have  a  copy,  and  that  a  copy  be 
tacked  up  in  the  directors'  room  and  in  the  office  of 
each  executive  officer  for  convenient  reference.  The 


DUTIES    OF    THE    FUNCTIONAL   COMMITTEES      111 

chief  use  of  such  a  list,  besides  that  of  recording  the 
assignment  of  work  to  the  several  committees,  is 
that  of  being  an  aid  to  the  memory,  so  that  when  any 
director  asks  himself  the  question,  'what  subject  shall 
I  now  investigate,  or  what  subjects  shall  I  bring  before 
the  committee  or  the  board?'  he  may  look  over 
the  list  and  select  from  it  the  items  that  he  thinks 
should  now  be  considered,  and  make  a  note  of  them. 
Under  the  old  system  of  management  the  manager 
usually  did  not  consider  a  problem  until  it  was  forced 
upon  him  by  some  emergency;  he  was  so  busy  forcing 
the  material  through  the  shop  and  getting  orders 
filled  that  he  had  no  time  to  take  up  subjects  that 
could  possibly  be  postponed,  such  as  improved 
methods  of  production,  and  they  would  be  allowed  to 
pass  out  of  his  mind.  By  the  new  method,  each 
committee  has  constantly  before  it  a  list  of  things  to 
be  thought  of,  and  there  can  be  no  excuse  for  neglect- 
ing to  consider  them.  Here  is  the  list: 

FINANCE 

Committee:    President,  general  manager,  adviser. 

Capital  stock:  outstanding;  to  be  issued;  plans 
for  increasing. 

Bonded  debt;  secured  notes;  bills  and  accounts 
payable. 

Cash;  bills  and  accounts  receivable. 

Investment  of  capital:  in  buildings  and  equip- 
ment; in  raw  material;  in  work  in  progress;  in  fin- 


112  INVESTIGATING   AN   INDUSTRY 

ished  goods  in  warehouse  and  on  consignment;  in 
advance  advertising. 

Surplus  available;  for  dividends;  for  reserves;  for 
extensions  of  business. 

Appropriations  and  other  financial  plans  for  com- 
ing years. 

Banking:  interest;  use  of  credit. 

ACCOUNTS 

Committee:    Vice-president,  treasurer,  secretary. 

Book-keeping  system. 

Cost  accounts;  distribution  of  burden. 

Book-keepers  and  clerks. 

Cost  of,  and  improvements  in  accounting  system. 

Auditing. 

INFORMATION  AND  STATISTICS 

Committee:   Secretary,  vice-president. 

Bureau  of  information:   catalogues  and  price  lists. 

Filing  system  for  correspondence,  records,  esti- 
mates, drawings. 

Statistics  and  charts,  monthly  and  annual. 

Classification  of  sales  statistics:  by  products;  ter- 
ritorial. 

Charts  of  production,  of  factory  and  selling  costs. 

Study  of  charts  and  drawing  conclusions:  products; 
variety;  quantity;  profitable  or  unprofitable;  de- 
mand regular,  seasonable  or  fluctuating. 

Leak-hunting;   inventories. 

FACTORY 

Committee:  General  manager,  adviser,  sales 
manager. 


DUTIES   OF   THE   FUNCTIONAL   COMMITTEES      113 

Products:    design;    quality;    method  of  making. 

Material:  quality;  specifications  and  tests;  requisi- 
tions; seasonable  purchasing;  prices;  storage;  hand- 
ling; scrap;  by-products. 

Designing;  drafting;  estimating. 

Superintendents,  foremen;  foremen's  committee; 
purchasing  agent. 

Blacksmith  shop,  pattern  shop  and  store  room. 

Machine  shop:  equipment;  arrangement  of  ma- 
chines; handling  of  work  in  progress;  interior  trans- 
portation; care  of  tools. 

Power  plant;  engineering  tests;  friction;  lubrica- 
tion; boilers  and  boiler  appliances;  means  for  im- 
proving economy;  engines;  condensers;  dynamos; 
motors;  power  transmission;  fuel  storage  and  hand- 
ling, ash  handling. 

New  machinery  for  new  or  old  products. 

Load  factor,  means  for  increasing. 

Consider  purchasing  certain  small  parts  instead  of 
making  them. 

Inventory  of  machines,  age,  cost,  depreciation. 

Items  in  scientific  management  of  factory;  tool 
room,  tool  grinder,  messenger  service;  store-room; 
standard  sizes  and  shapes  of  tools  and  of  parts  of 
product;  planning  room;  routing;  moving;  cars, 
cranes,  trucks,  elevators;  functional  foremen;  speed 
and  feed  boss;  care  of  belts;  disciplinarian;  time, 
motion  and  fatigue  study;  standardizing  operations; 
instruction  cards;  mnemonic  symbols;  wage  systems; 
task  and  bonus;  standardized  records;  graphical 
daily  balance;  plotting  of  results;  effect  of  changed 
methods  upon  cost. 


114  INVESTIGATING   AN   INDUSTRY 

Planning  ahead  for  work  to  be  done  in  coming 
months. 

LABOR 

Committee:   Secretary,  general  manager. 

Classification  and  records  of  workmen,  length  of 
service,  promotions,  wages,  premium,  bonus,  piece- 
work. Changes,  desirable.  Apprentices. 

Methods  of  training  workmen,  apprentices'  school. 

Pensions,  old  age  and  disability;  accident  insur- 
ance; prevention  of  accidents;  first-aid  hospital. 

Welfare  work;  sanitation;  workmen's  houses. 

Complaints  and  suggestions  by  workmen.  Work- 
men's committees. 

SALES 

Committee:  Sales  manager,  general  manager, 
secretary. 

Selling  methods;    prices;    discounts;    commissions. 

Contracts  with  salesmen,  agents,  and  wholesale 
houses.  Department  stores;  mail-order  houses. 

Methods  of  increasing  sales;  publicity  advertis- 
ing, correspondence,  circulars,  bulletins,  cutting 
prices,  exclusive  contracts. 

Methods  of  reducing  selling  expense.  Training  of 
salesmen. 

Charts  of  history  of  business,  and  of  expected  busi- 
ness, classified  by  products  and  by  districts. 

NEW  DEVELOPMENT 

Committee:  Sales  manager,  general  manager, 
treasurer. 

Investigation  of  factory  conditions,  as  to  location 


DUTIES    OF    THE   FUNCTIONAL   COMMITTEES      115 

with  reference  to  raw  material,  labor,  climate,  work- 
men's houses  and  surroundings,  market  for  product, 
transportation,  freight  rates;  as  to  buildings,  with 
reference  to  size,  shape,  arrangement,  floors,  roofs, 
heating  and  ventilation,  lighting,  natural  and  artificial, 
fire  protection,  sanitation,  safety  devices.  Investiga- 
tion of  the  desirability  of  new  buildings  and  of  re- 
location of  the  whole  or  any  part  of  the  factory. 

Investigation  of  changes  in  market  conditions, 
such  as  lessened  demand  for  products  on  account  of 
competition,  change  of  fashion,  improvement  in  rival 
products,  changes  in  methods  of  distribution;  and 
making  new  plans  in  view  of  these  changes. 

Methods  of  finding  new  things  to  make  and  to  sell, 
and  of  reaching  conclusions  as  to  what  new  things 
should  be  made,  how  and  in  what  quantity  they  should 
be  made,  and  what  provision  in  the  way  of  new  equip- 
ment is  needed  for  them. 

Methods  of  extending  the  market;  foreign  trade. 

Abandonment  of  unprofitable  and  obsolescent  lines 
of  products.  Lessening  of  the  variety  of  shapes  and 
sizes  catalogued  and  kept  in  stock. 

When  he  had  presented  the  list  the  doctor  said: 
"I  think  we  may  now  adjourn  and  await  the  call  of 
the  president  for  the  first  meeting  of  the  board  of 
directors,  but  I  have  three  brief  paragraphs  concern- 
ing scientific  management  which  I  would  like  to 
have  printed  on  the  same  card  as  the  list  of  subjects, 
so  that  it  may  be  a  constant  reminder  to  each  member 
of  the  board  concerning  his  duties  and  his  mental 
attitude.  I  will  read  them. 


116  INVESTIGATING   AN    INDUSTRY 

SCIENTIFIC  MANAGEMENT 

"  Scientific  Management  includes  the  critical  ob- 
servation, analysis,  and  classification  of  all  industrial 
and  business  phenomena,  and  the  systematic  applica- 
tion of  the  resulting  records  to  secure  the  most 
efficient  production  and  distribution  of  products  and 
to  make  preparations  for  future  developments.  Its 
most  prominent  element  is  the  mental  attitude  that 
consciously  applies  the  principles  of  scientific  investi- 
gation to  all  the  phenomena  of  business  and  the 
transference  of  skill  to  all  its  activities. 

"The  mental  attitude  referred  to  above  is  the 
exact  opposite  of  that  mental  inertia  that  leads  one 
to  say  ' whatever  is  is  right.'  On  the  contrary,  it 
leads  to  the  saying,  ' whatever  is  may  be  wrong;  I 
am  going  to  investigate  and  find  out  whether  it  is 
right  or  wrong.' 

"  Duties  of  the  Executives  under  Scientific  Manage- 
ment.— Executives  must  have  a  practical  knowledge 
of  how  to  observe,  record,  analyze  and  compare 
essential  facts  in  relation  to  all  that  enters  into  or 
affects  the  economy  of  production,  the  cost  of  the 
product,  the  present  and  prospective  market  for  the 
product,  the  selling  department,  and  the  possible 
profits." 

On  motion,  the  meeting  adjourned. 


APPENDIX 
A  New  Kind  of  Factory  Expert — The  Leak  Hunter  * 

THE  president  of  a  large  manufacturing  company 
recently  asked  us  to  recommend  a  man  for  a  new 
position  he  wished  to  create  in  his  factory  to  relieve 
the  manager  of  some  work  which  the  manager  was 
supposed  to  look  after.  The  existing  condition  of  the 
concern  was  outlined  about  as  follows:  There  is  a 
large  and  splendidly  equipped  factory  full  of  orders, 
well  organized,  doing  a  reasonably  profitable  competi- 
tive business.  The  president  is  the  chief  executive. 
He  decides  upon  the  general  policy  and  is  directly  in 
charge  of  the  sales  department,  whose  duties  it  is  to 
fill  the  factory  with  orders  for  the  most  profitable  kind 
of  goods.  The  general  manager's  duty  is  to  get  these 
goods  produced  and  with  the  maximum  of  profit  per 
piece.  The  labor  situation  is  satisfactory  to  the  work- 
men, piece  work  being  generally  introduced.  The 
machine  tools  are  of  modern  make,  speeded  to  the 
limit,  and  the  facilities  for  handling  goods  are  ex- 
cellent. There  is  a  good  cost  system  and  every  de- 
tail of  cost  is  faithfully  recorded.  There  are  also  a 
works  chemist  and  a  physical  testing  laboratory. 

*  An  editorial  in  Industrial  Engineering,  December,  1909. 
117 


118  INVESTIGATING   AN   INDUSTRY 

On  the  surface  of  things  no  factory  could  be  in  a 
better  condition.  Every  man  appears  to  be  doing  his 
full  duty,  and  the  manager  especially  is  driving  things 
to  the  utmost.  The  president,  however,  is  not  satis- 
fied. Competition  is  intense,  prices  of  many  of  the 
articles  sold  offer  small  margin  of  profit.  Fashions 
in  forms  of  the  things  made  are  changing.  There  has 
to  be  a  large  force  of  draftsmen  and  wood  and  metal 
patternmakers  employed  to  keep  up  with  the  designs 
that  are  called  for.  Sales  are  tending  to  increase, 
some  departments  are  overcrowded,  and  the  manage- 
ment will  soon  have  to  face  the  problem  of  either 
making  extensions  or  abandoning  some  departments 
to  make  room  for  the  growth  of  others.  Power  seems 
to  be  costing  too  much.  Will  it  pay  to  change  the 
system  of  generating  and  transmitting  power?  Are 
the  iron  and  brass  mixtures  the  best  for  which  pur- 
pose they  are  used?  Will  it  pay  to  put  in  automatic 
machines  for  some  of  the  work?  Should  some  of  the 
parts  of  things  now  made  in  the  factory  be  purchased 
outside?  Should  the  premium  system  of  paying 
labor  be  instituted  in  any  part  of  the  works  for  the 
part  piece  work  and  part  day's  work  that  now  pre- 
vails? Can  some  of  the  machines  be  speeded  up? 
Are  any  of  the  machines  so  far  out  of  date  or  repair 
that  they  should  be  replaced  by  others?  Is  the  cost 
system  costing  too  much?  Does  it  give  all  the  in- 
formation that  it  should?  Are  high-priced  men  en- 


THE    LEAK    HUNTER  119 

gaged  a  large  part  of  their  time  in  doing  low-priced 
work? 

The  president  cannot  answer  these  questions.  He 
is  too  busy  in  his  own  department  to  study  them. 
The  manager  cannot,  for  his  time  is  taken  up  in  run- 
ning things  as  they  are,  and  he  is  satisfied  with  things 
as  they  are.  The  cost  clerks  cannot,  for  they  are 
merely  cost  clerks.  They  tabulate  the  data,  but  have 
no  power  of  reasoning  from  them. 

The  old-fashioned  method  of  answering  such  ques- 
tions was  not  to  answer  them  at  all  if  it  could  possibly 
be  avoided.  They  were  all  considered  questions  of 
minor  importance  as  compared  with  the  question  of 
driving  the  business,  and  the  policy  of  the  works  was 
usually  to  "let  well  enough  alone."  Let  the  other 
man  do  the  experimenting  in  new  methods.  The 
modern  idea  is  just  the  opposite.  It  is  that  there  is 
nothing  so  well  done  in  a  factory  that  it  might  not  be 
done  better,  but  the  trouble  with  this  idea  is  that  no 
one  has  either  the  time  or  the  knowledge  requisite  for 
the  systematic  study  that  is  needed  in  order  to  make 
a  wise  decision  in  regard  to  making  changes  in  ma- 
chinery or  improvements  in  methods. 

The  president  of  the  concern  referred  to  recogniz- 
ing this  fact  wishes  to  employ  some  one  to  study  the 
general  problem  of  what  things  in  the  factory  need  to 
be  improved  and  then  how  to  improve  them.  '  We 
gave  him  the  names  of  some  of  the  leading  outside 


120  INVESTIGATING   AN   INDUSTRY 

experts  on  factory  organization  and  advised  him  to 
apply  to  them  for  assistance.  His  idea  is,  however, 
that  he  should  permanently  employ  some  young  man 
in  the  factory  to  look  after  the  matters  and  be  a  sort 
of  perpetual  "leak-hunter." 

It  is  a  serious  question  whether  any  one  who  is 
brought  up  inside  of  a  factory  can  be  as  successful  a 
leak-hunter  as  one  who  has  had  a  special  training  in 
that  direction.  The  ideal  man  for  the  purpose  would 
be  one  having  both  theoretical  and  practical  knowledge 
of  factory  operations  and  management  and  who  has 
also  had  considerable  outside  experience  under  the 
direction  of  leading  experts  in  this  line.  Such  a  man 
would  necessarily  be  a  very  high  priced  man,  so  high 
priced  indeed  that  it  would  require  considerable 
courage  on  the  part  of  the  president  of  a  manufactur- 
ing concern  to  employ  him.  The  services  asked  of 
such  a  man  are  not  those  of  either  a  clerk  or  a  manu- 
facturing superintendent.  They  are,  in  fact,  those  of 
a  skilled  diagnostician  of  factory  diseases.  The 
possible  number  of  such  diseases  may  run  into  the 
hundreds  and  many  of  them  are  difficult  of  detection. 
The  man  who  can  ferret  out  and  devise  the  proper 
remedies  is  as  important  to  a  large  organization  as 
either  the  president  or  the  general  manager. 

In  one  concern  we  visited  some  years  ago  we  found 
a  man  who  was  known  by  the  title  of  " Statistician." 
His  business  was  to  be  able  to  answer  every  possible 


LOCATING     AN     INDUSTRY  121 

question  that  the  general  manager  could  ask  him  if 
the  answer  could  be  expressed  in  the  shape  of  figures. 
It  would  seem  that  the  modern  factory  must  have, 
first,  a  well-planned  cost  system,  a  statistician  who 
is  able  to  digest  the  cost  system  and  make  abstracts 
and  plotted  diagrams  from  it,  and  finally  a  skilled 
leak  hunter,  as  we  have  termed  him,  who  can  interpret 
these  diagrams  and  abstracts  and  from  them  draw  con- 
clusions as  to  what  changes  ought  to  be  made  in  the 
way  of  doing  things  in  order  to  increase  the  efficiency 
of  the  factory.  The  leak  hunter  probably  exists  in 
many  factories,  but  under  a  different  title.  He  will 
be  a  necessity  of  all  large  factory  organizations  in  the 
future. 

Locating  an  Industry 

SOME  philosopher  has  said  that  if  a  man  makes 
even  a  mouse-trap  better  than  any  one  else,  though  he 
build  his  hut  in  the  woods,  the  world  will  make  a 
beaten  track  to  his  door — or  words  to  that  effect. 
In  the  good  old  days,  before  trade  papers  existed,  the 
statement  may  have  been  true.  Somewhere  in  the 
State  of  New  York,  in  the  early  part  of  the  last 
century,  David  Maydole  made  some  good  hammers, 
and  his  neighbors  began  beating  the  track  to  his 
door,  and  finally  the  whole  world  came  to  him  for 
hammers.  In  those  old  days  factories  were  not 

*  Editorial  in  Industrial  Engineering,  December,  1913. 


122  APPENDIX 

" located,"  they  "just  growed,"  and  their  loca- 
tion was  usually  the  town  in  which  the  owner  happened 
to  live.  Many  famous  concerns  had  their  begin- 
nings in  this  way  in  locations  which  nowadays 
would  be  thought  to  have  many  disadvantages.  The 
Fairbanks  Co.,  in  St.  Johnsbury,  Vermont,  is  an  in- 
stance. The  great  copper  and  brass  industries  in 
the  Naugatuck  Valley,  Connecticut,  grew  in  a  lo- 
cation that  would  now  be  considered  far  from  the 
best.  The  handicaps  of  distance  from  raw  material, 
from  fuel,  and,  in  many  cases,  from  the  market,  were 
overcome  by  the  advantages  of  cheap  labor,  of  busi- 
ness enterprise,  and  of  reputation  for  quality  of 
product. 

In  modern  times,  however,  these  special  advantages 
which  were  held  by  some  manufacturers  are  disap- 
pearing. Cheap  labor  has  gone,  business  enter- 
prise is  becoming  universal,  and  goods  are  now 
bought  on  specification  and  test  rather  than  upon 
the  name  of  a  brand.  Reputation,  which  used  to  be 
obtained  by  long  years  of  struggle,  is  now  obtained 
in  two  or  three  years  by  extensive  advertising  and  by 
public  demonstration  of  quality  and  performance. 
Success  in  manufacturing  in  the  future  is  to  be  ob- 
tained not  by  mere  reputation  for  quality  and  by  two 
or  three  favorable  conditions,  such  as  ample  capital 
and  cheap  labor,  but  only  by  the  combination  of  all 
the  desirable  conditions,  one  of  which  is  location. 


LOCATING    AN    INDUSTRY  123 

The  fact  that  locations  that  were  good  enough 
in  past  times  are  not  good  enough  now  is  shown  by 
the  migrations  of  many  large  concerns  and  the 
establishment  of  new  concerns  in  places  far  removed 
from  the  old  centres  of  industry.  The  first  great 
relocation  of  industries  in  this  country  took  place  in 
the  iron  trade.  Fifty  years  ago  its  centre  was  in 
eastern  Pennsylvania,  chiefly  in  the  Lehigh  and 
Schuylkill  valleys.  Between  1870  and  1880  it  was 
moved  to  Pittsburgh  and  vicinity,  to  Cleveland,  to 
Chicago,  and  to  Alabama.  Philadelphia,  then  was 
the  centre  of  the  heavy  machine-tool  trade,  with 
numerous  small  concerns  in  New  England;  now  Cin- 
cinnati and  Cleveland  are  competing  with  them  in 
foreign  as  well  as  in  domestic  markets.  Shoe  manu- 
facturing, which  used  to  be  confined  to  New  England, 
is  now  being  scattered  over  the  West.  Cotton  manu- 
facturing has  developed  in  the  South.  Of  individual 
concerns  that  are  moving  or  scattering,  instances  are 
the  Baldwin  Locomotive  Works,  of  Philadelphia, 
which  has  built  a  new  works  on  the  Delaware,  near 
Chester,  and  the  General  Electric  Co.,  which  is  locat- 
ing its  new  plant  at  Erie,  Pa.,  on  Lake  Erie,  instead  of 
enlarging  its  plants  at  Schenectady  and  at  Lynn. 

In  locating  a  new  factory  the  owners  should  have  a 
long  look  ahead  into  the  future.  Conditions  are 
changing  so  that  a  location  that  is  good  to-day  may 
not  be  good  ten  years  hence,  and  hasty  removal  from 


124  APPENDIX 

one  place  to  another,  following  the  crowd,  may  prove 
in  the  long  run  not  to  be  good  policy.  An  instance  of 
this  is  the  recent  transfer  of  the  manufacture  of 
clothing  from  down- town  to  Fifth  Avenue  in  New  York. 
If  the  millions  that  have  been  spent  in  building  sky- 
scrapers with  marble  fronts  to  accommodate  the 
multitudes  of  sewing-machine  operators  had  been  put 
into  a  far  cheaper  location  on  the  East  River,  close  to 
the  homes  of  the  operators,  it  would  have  been 
well  for  all  concerned. 

Some  of  the  conditions  that  should  be  taken  into 
account  in  locating  a  new  factory  that  is  expected  to 
become  of  great  size  are  the  following:  With  respect 
to  material : — cost  of  obtaining  raw  material  delivered 
at  the  factory;  permanence  of  the  supply  from  its 
present  source;  where  other  supplies  may  be  had  if  the 
present  source  fails  (lumber,  for  example).  Cost  of 
transportation  of  finished  goods  to  the  various  mar- 
kets. Transportation  by  automobile  trucks,  by  rail, 
by  water,  river,  lake  or  canal.  (The  opening  of  the 
Panama  Canal  and  of  the  New  York  Water  Barge 
Canal  is  going  to  affect  some  locations.)  Cost  of  fuel, 
coal,  oil  or  gas;  if  oil  or  gas,  permanence  of  the  supply. 
Water-power,  quantity  available  and  its  probable  per- 
manence. Electric  power  from  a  central  station, 
cost  of,  compared  with  cost  from  an  isolated 
plant. 

Real  estate;  first  cost,taxes,  present  and  prospective; 


LOCATING    AN    INDUSTRY  125 

room  for  extensions;  room  for  development  of  a  work- 
men's town. 

With  reference  to  labor.  Availability  of  an  abun- 
dant supply,  skilled  and  unskilled.  Conditions  for 
keeping  workmen  satisfied  to  remain  in  the  works, 
nearness  of  city  or  town  supplying  good  and  cheap 
markets,  comfortable  homes,  schools,  playgrounds, 
churches,  hospitals,  medical  attendance,  recreation. 
Control  by  trades  unions. 

We  regard  this  question  of  keeping  workmen  satis- 
fied to  remain  in  the  works  as  one  of  the  most  im- 
portant industrial  questions  of  the  future.  It  is  not 
merely  a  question  of  wages  and  of  hours,  but  of  every- 
thing that  enters  into  a  workman's  life.  One  of  the 
chief  real  troubles  of  the  workmen  to-day  is  the  high 
cost  of  food  due  to  the  unscientific  methods  of  getting 
the  food  from  the  producer.  It  would  be  well  for  some 
of  the  concerns  that  are  moving  from  the  cities  into 
the  country  to  consider  whether  the  time  has  not 
arrived  for  manufacturers  employing  one  or  more 
thousands  of  workmen  to  establish  a  co-operative 
store  for  them,  which  will  buy  produce  directly  from 
the  farmers,  and  which  will  operate  a  cold-storage 
warehouse  and  a  canning  factory.  In  many  com- 
panies to-day  the  workmen  are  sharing  in  the  profits 
of  the  business  by  becoming  stockholders.  They  also 
invest  their  savings  with  the  company,  and  have 
accident  insurance  and  old-age  pensions.  It  is  only 


126  APPENDIX 

a  further  development  in  the  same  direction  to  pro- 
vide the  means  by  which  they  can  obtain  cheap  food 
and  so  reduce  the  cost  of  living,  and  thereby  make 
savings  which  may  be  invested  in  the  company's 
stock.  This  is  a  far  better  way  of  overcoming  the 
so-called  "  injustice  of  the  present  industrial  system" 
than  the  plan  that  the  Socialists  are  continually 
agitating,  that  of  having  the  community  or  the  State 
become  the  owner  of  all  the  implements  of  industry. 
It  will  be  a  step  forward  to  the  day  mentioned  by  the 
late  Abram  S.  Hewitt  in  an  address  made  more  than 
twenty  years  ago  (Trans.  Am.  Inst.  Mining  Engrs., 
1890, )  when,  instead  of  capital  employing  labor,  labor 
will  employ  capital. 


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